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

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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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Bibliographic Info

Paper provided by Hanseatic University, Germany, Department of Economics in its series Working Papers with number 002.

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Length: 23 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:phu:wpaper:002

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Web page: http://www.hanseuni.com

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Cited by:
  1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.

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