Private ordering: A comparative institutional analysis of hostage games*

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. Notes We thank Maarten Duijvendak, Gideon Keren, Peter Marsden, and Chris Snijders for their helpful suggestions. Visiting appointments of Jeroen Weesie at the Department of Sociology, Harvard University, and of Werner Raub at the Department of Sociology, University of Chicago, provided useful support in preparing the paper and are gratefully acknowledged. Financial support was provided by the Netherlands Organization for Scientific Research (NWO) under Grant PGS 50–370 and by the Royal Netherlands Academy of Arts and Sciences (KNAW). The order of authorship was established by pseudo‐randomization.