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 in half and giving the agent one 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.