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 and giving the agent 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.
Year of publication: |
2008-02
|
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Authors: | Kritikos, Alexander S. ; Tan, Jonathan H. W. |
Institutions: | Hanseatic University, Germany, Department of Economics |
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