Indenture as a Self-Enforced Contract Device: An Experimental Test
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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Volume (Year): 75 (2009)
Issue (Month): 3 (January)
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