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

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