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Indenture as a Commitment Device in Self-Enforced Contracts: An Experimental Test

Author

Listed:
  • Alexander S. Kritikos

    (GfA, Berlin & Europa-Universität Viadrina, Frankfurt (Oder))

  • Jonathan H.W. Tan

    (Europa-Universität Viadrina, Frankfurt (Oder))

Abstract

How can a principal (an agent) ensure that an agent (a principal) will work (pay up), if payment (work) precedes work (payment)? When a banknote is torn in two, each part is by itself worthless. A principal can pre-commit to payment-on-delivery, by tearing a banknote and giving the agent the first half as "prepayment"; the agent receives the completing half upon delivery of the service. This contract design is known as "indenture". It is selfenforcing and incentive-compatible. This paper experimentally tests the efficacy of the "indenture game" and its implications for cooperation in one-shot environments. We find that cooperation rates are high and stable over time. Its efficacy is moderated by expected losses due to the existence of uncooperative types.

Suggested Citation

  • Alexander S. Kritikos & Jonathan H.W. Tan, 2006. "Indenture as a Commitment Device in Self-Enforced Contracts: An Experimental Test," Working Papers 0005, Gesellschaft für Arbeitsmarktaktivierung (GfA).
    • Handle: RePEc:gfa:wpaper:0005
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    References listed on IDEAS

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    JEL classification:

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

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