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Indenture as a Self-Enforced Contract Device: An Experimental Test

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  • Alexander S. Kritikos
  • Jonathan H. W. Tan

Abstract

We experimentally test the efficacy of indenture as a self-enforced contract device. In an indenture game, the principal signals the intention of payment-on-delivery, by tearing a banknote and giving the agent half of it as "prepayment"; the agent receives the completing half after delivering the service. By forward induction, cooperation is incentive-compatibly self-enforcing. The indenture performs very well, inducing a significantly higher level of cooperation than that in a three-stage centipede game, which we use to benchmark the natural rate of cooperation. The difference between cooperation rates in both games increases over time.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.93262.de/dp851.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 851.

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Length: 33 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diwwpp:dp851

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Keywords: Cooperation; experiment; contracts; indenture; reciprocity;

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Cited by:
  1. Gary Charness & Peter J. Kuhn, 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," NBER Working Papers 15913, National Bureau of Economic Research, Inc.

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