Williamson (1983) - Credible Commitments Using Hostages To Support Exchange

• This page is referenced in BPP Field Exam Papers

Reference(s)

Williamson, Oliver, (1983), "Credible Commitments: Using Hostages to Support Exchange", The American Economic Review, Vol. 73, No. 4. pp. 519-540 pdf

Abstract

Credible commitments and credible threats share the following common attribute: both appear mainly in conjunction with irreversible, specialized investments. But whereas credible commitments are undertaken in support of alliances and to promote exchange, credible threats appear in the context of conflict and rivalry.' The former involve reciprocal acts designed to safeguard a relationship, while the latter are unilateral efforts to preempt an advantage. Efforts to support exchange generally operate in the service of efficiency; preemptive investments, by contrast, are commonly antisocial. Both are plainly important to politics and economics, but the study of credible commitments is arguably the more fundamental of the two.

Summary

This paper is concerned with using hostages to prevent opportunistic behaviour in incomplete contracts with relational-specific investments. However, I do not believe that the arguments are valid. Specifically if it is subgame perfect to "execute the hostages" (or to return them), then you do. End of story. In Williamson's defense, the paper may pre-date the notion of sub-game perfection.

I, therefore, do not summarize this paper here. Sorry Ollie.