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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 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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  • Alexander S. Kritikos & Jonathan H. W. Tan, 2009. "Indenture as a Self‐Enforced Contract Device: An Experimental Test," Southern Economic Journal, John Wiley & Sons, vol. 75(3), pages 857-872, January.
    • Handle: RePEc:wly:soecon:v:75:y:2009:i:3:p:857-872
    DOI: 10.1002/j.2325-8012.2009.tb00934.x
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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