Indenture as a Self-Enforced Contract Device: An Experimental Test | Zendy

Alexander S. Kritikos | Zendy; Jonathan H. W. Tan | Zendy

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Indenture as a Self-Enforced Contract Device: An Experimental Test

Author(s) -

Alexander S. Kritikos,

Jonathan H. W. Tan

Publication year - 2009

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.1430871

Subject(s) - prepayment of loan , banknote , incentive , dictator game , benchmark (surveying) , payment , test (biology) , principal (computer security) , service (business) , business , computer science , computer security , microeconomics , economics , finance , marketing , artificial intelligence , geodesy , biology , geography , paleontology

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.

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