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

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Author Info
Alexander S. Kritikos ()
Jonathan H. W. Tan ()

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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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Publisher 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
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Handle: RePEc:phu:wpaper:002

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

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  1. Falk, Armin & Gachter, Simon & Kovacs, Judit, 1999. "Intrinsic motivation and extrinsic incentives in a repeated game with incomplete contracts," Journal of Economic Psychology, Elsevier, vol. 20(3), pages 251-284, June. [Downloadable!] (restricted)
  2. Cooper, Russell & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1993. "Forward Induction in the Battle-of-the-Sexes Games," American Economic Review, American Economic Association, vol. 83(5), pages 1303-16, December. [Downloadable!] (restricted)
  3. Gary Charness, 2004. "Attribution and Reciprocity in an Experimental Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 553-584, July. [Downloadable!]
  4. van Damme, Eric, 1989. "Stable equilibria and forward induction," Journal of Economic Theory, Elsevier, vol. 48(2), pages 476-496, August. [Downloadable!] (restricted)
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  5. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May. [Downloadable!] (restricted)
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  6. Friedel Bolle & Alexander Kritikos, 2006. "Reciprocity, Altruism, Solidarity: A Dynamic Model," Theory and Decision, Springer, vol. 60(4), pages 371-394, 06. [Downloadable!] (restricted)
  7. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May. [Downloadable!] (restricted)
  8. Werner Güth & Wolfgang Klose & Manfred Königstein & Joachim Schwalbach, 1998. "An experimental study of a dynamic principal-agent relationship," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 327-341.
  9. Roland Benabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 489-520, 07. [Downloadable!] (restricted)
  10. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
  11. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September. [Downloadable!] (restricted)
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  12. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February. [Downloadable!] (restricted)
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  13. Kritikos, Alexander & Bolle, Friedel, 2001. "Distributional concerns: equity- or efficiency-oriented?," Economics Letters, Elsevier, vol. 73(3), pages 333-338, December. [Downloadable!] (restricted)
  14. Falk, Armin & Kosfeld, Michael, 2004. "Distrust - The Hidden Cost of Control," IZA Discussion Papers 1203, Institute for the Study of Labor (IZA). [Downloadable!]
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  15. Kritikos, Alexander S., 2000. "Indenture: an institution for a credible commitment without extortion," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 397-403, November. [Downloadable!] (restricted)
  16. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July. [Downloadable!] (restricted)
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  17. Kritikos, Alexander S. & Bolle, Friedel, 1998. "Indenturing banknotes as a mechanism to induce cooperation in conflict games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 279-294, February. [Downloadable!] (restricted)
  18. Huck, Steffen & Muller, Wieland, 2005. "Burning money and (pseudo) first-mover advantages: an experimental study on forward induction," Games and Economic Behavior, Elsevier, vol. 51(1), pages 109-127, April. [Downloadable!] (restricted)
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