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

  • Alexander S. Kritikos

    ()

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

  • Jonathan H.W. Tan

    ()

    (Europa-Universität Viadrina, Frankfurt (Oder))

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.

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Paper provided by Gesellschaft für Arbeitsmarktaktivierung (GfA) in its series Working Papers with number 0005.

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Length: 18 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:gfa:wpaper:0005
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