Journal of Economic Behavior & Organization Vol. 42 (2000) 135–136
A comment on indentured servitude: in response to
Kritikos and Bolle — February 15th, 1998
Gerhard Holt
∗Department of Economics, Villanova University, Villanova, PA 19085, USA
Received 21 May 1998; received in revised form 29 May 1998; accepted 27 May 1999
Abstract
Kritikos and Bolles’ arguments are internally inconsistent-indenture as formulated by the authors would result in mutual defection. ©2000 Elsevier Science B.V. All rights reserved.
JEL classification: C 70
Keywords: Game theory; Prisoner’s dilemma; Trust; Indenture
Kritikos and Bolle (1998) argue that indenturing may allow for stable cooperation to develop between a principal and an agent in the absence of reputation effects, community enforcement (Kandori, 1992a, b), iterated play or other standard mechanisms for inducing non-defection behavior (Kreps et al., 1982). They propose that the agent-after receiving some (sunk) payment will perform a service in exchange for release from an indenture. This release is conveyed by the principal to the agent after satisfactory performance of the required service. The authors argue that the principal can be relied upon to release the agent once the agent has completed the period of indenture, and that the principal will not or cannot coercively extract further service. Kritikos and Bolle argue that the agent would refuse to perform any additional service, and therefore, the principal would be indifferent between releasing the agent or playing a ‘malicious strategy’.
Kritikos and Bolle’s analysis may be seriously flawed. To see why, let’s assume that their arguments hold. If the authors’ arguments hold, the principal can resell the indenture to a new owner after the agent had performed the initial required service. The unfortunate agent would then be faced with the exact same game that he played when he first left the ship and was going to work for the first principal! (Remember that cost of passage is sunk, and
∗Present address: ASUC 224, Berkeley, CA 94720-4510.
E-mail address: holt@monet.csc.vill.edu (G. Holt).
136 G. Holt / J. of Economic Behavior & Org. 42 (2000) 135–136
there are no reputation or external enforcement effects Kritikos and Bolle emphasize the single-shot nature of this game.)
Therefore, if the authors’ analysis is correct, the agent should willingly go work for the new principal. Such a finding might still be internally consistent, except that we must not fall into the transparent fixed disposition fallacy (Gauthier, 1986; Binmore, 1994) as the authors seem to have done. The principal will not be indifferent to voiding the indenture if it could be resold. Principals would then consistently defect (in the absence of community enforcement, reputation, etc). The agent, being rational, would therefore, refuse to perform on the initial indenture, and therefore, the whole transaction would unwind. Kritikos and Bolle’s findings are therefore internally inconsistent.
The bottom line is that in the absence of reputation or iterated play-indenture-is not viable. This should not surprise anyone. Despite the trimmings, the sole ‘economic’ equilibrium in single-shot Prisoner’s dilemma remains-as always-mutual defection.
References
Binmore, K., 1994. Game Theory and the Social Contract: Playing Fair, Vol. 1. M.I.T. Press, Cambridge, MA, USA.
Gauthier, D., 1986. Maximization constrained: the rationality of cooperation, reprinted from: morals by agreement, In: Moser, Paul (Ed.), Rationality in Action: Contemporary Approaches, 1990, Cambridge University Press, pp. 315–334.
Kandori, M., 1992a. Social norms and community enforcement Review of Economic Studies 59, 63–80. Kandori, M., 1992b. Repeated games played by overlapping generations of players Review of Economic Studies
59, 81–92.
Kreps, D.M., Milgrom, P., Roberts, J., Wilson, R., 1982. Rational cooperation in the finitely repeated Prisoner’s dilemma Journal of Economic Theory 27, 245–252.
