PRIVATE ORDERING - A COMPARATIVE INSTITUTIONAL ANALYSIS OF HOSTAGE GAMES

Hostage posting (in the sense of pledging a bond) is a commitment devi ce that allows for cooperation of rational actors in economic and soci al relations with incentive problems, like in the Prisoner's Dilemma. This paper provides, first, an informal discussion of hostage posting as a mechanism of cooperation. We then analyze noncooperative 2- and n -person games with complete information where players can post a hosta ge prior to their interaction. We compare rather general hostage 'inst itutions' that specify the conditions under which hostages are declare d forfeited and, if forfeited, whether the hostages are are transferre d to another player or are lost. The problem of designing efficient ho stage institutions is addressed and solved for 2-person settings. The minimal institutional requirement for individually rational hostage po sting and subsequent cooperation is, roughly, that a player's hostage is forfeited if hostages have been posted by everyone and if the playe r deviates unilaterally from cooperation. Furthermore, the hostages po sted have to be sufficiently valuable, i.e., match the players' costs of cooperation, and the transaction costs associated with hostage post ing have to be sufficiently low.