Private ordering: A comparative institutional analysis of hostage games*

Publisher Website
Google Scholar
Abstract
Hostage posting (in the sense of pledging a bond) is a commitment device that allows for cooperation of rational actors in economic and social relations with incentive problems, like in the Prisoner's Dilemma. This paper provides, first, an informal discussion of hostage posting as a mechanism of cooperatioa We then analyze noncooperative 2‐ and n‐person games with complete information where players can post a hostage prior to their interaction. We compare rather general hostage ‘institutions’ that specify the conditions under which hostages are declared forfeited and, if forfeited, whether the hostages are transferred to another player or are lost. The problem of designing efficient hostage institutions is addressed and solved for 2‐person settings. The minimal institutional requirement for individually rational hostage posting and subsequent cooperation is, roughly, that a player's hostage is forfeited if hostages have been posted by everyone and if the player deviates unilaterally from cooperation. Furthermore, the hostages posted have to be sufficiently valuable, i.e., match the players’ costs of cooperation, and the transaction costs associated with hostage posting have to be sufficiently low.

This publication has 28 references indexed in Scilit: