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

  • Alexander S. Kritikos


    (DJW-Berlin 10108 Berlin, Germany 8 GFA Berlin, Kufsteinroster, 10808 Berlin, Germany)

  • Jonathan H. W. Tan


    (Nottingham University Business School, the University of Nottingham, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB, United Kingdom)

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 in half and giving the agent one 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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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2009)
Issue (Month): 3 (January)
Pages: 857–872

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Handle: RePEc:sej:ancoec:v:75:3:y:2009:p:857-872
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