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Title:Indenture as a Commitment Device in Self-Enforced Contracts: An Experimental Test PDF Logo
Authors:Kritikos, Alexander S.
Tan, Jonathan H. W.
Issue Date:2005
Series/Report no.:Diskussionspapiere / Europa-Universität Viadrina Frankfurt (Oder), Wirtschaftswissenschaftliche Fakultät 241
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 self-enforcing and incentive-compatible. This paper experimentally tests the efficacy of the "indenture game" and its implications for cooperation in oneshot 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.
Subjects:Cooperation
Experiment
Contracts
Indenture
Reciprocity
JEL:C91
J41
D64
Document Type:Working Paper
Appears in Collections:Diskussionspapiere, Wirtschaftswissenschaftliche Fakultät, Europa-Universität Viadrina

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