COMMITMENTS AND
CREDIBILITY
Credible Commitments
• In the chicken game, P1’s commitment to go straight is
credible because the move is incentive compatible
• What if she actually does not have an incentive to follow
through on the commitment when called upon to move?
• Example: Tiger by the tail
• If the tiger cannot commit in advance not to bite the boy, then the
boy will hold on forever making both the boy and the tiger worse off
• But the tiger’s promise not to bite is not credible because when
called upon to move, the tiger has an incentive to bite.
Tiger by the tail extensive form
Let go
(1,4)
~Bite
(4,2)
Tiger
Boy
Hold
Bite
(2,1)
Tiger by the tail extensive form
Let go
(1,4)
~Bite
(4,2)
Tiger
Boy
Hold
Bite
(2,1)
How can tiger make a credible
commitment?
• First let us ask what the different types of commitments
are
• Then let us ask what makes these commitments credible
Strategic Moves
• Strategic moves are designed to alter the beliefs and
actions of others in a direction favorable to yourself
• Warnings and assurances are non-strategic
• Threats and Promises are strategic
Warnings and Assurances
• Opening move that informs target what you will
do when it is your turn to move
• When you are called upon to move, there is no
temptation to renege
• Therefore, warnings and assurances merely play
an informational role and don’t change others’
expectations and don’t influence target’s
behavior
• Objective is persuasion
• Don’t require commitment; credibility not an
issue
Threats and Promises
• Strategic Moves: objective is to influence behavior of
target
• First mover often has the advantage (unconditional move)
• Second mover can gain first-mover advantage by precommitting to a response rule (conditional move: if you do
x, then I will/will not do y)
Threats
• A response rule that punishes target who fails to
cooperate
• Compellent threats induce action (Ransom)
• Deterrent threats deter action (deterrence)
• *BOTH sides will suffer if the threat has to be
carried out (otherwise pre-commitment not
necessary)
• Therefore, there is an incentive to renege
Promise
• A response rule that rewards others who
cooperate with you
• Compellent promises (If you eat your broccoli, you can
have dessert)
• Deterrent promises (Don’t hit your brother, and I
will . . . )
• Will have to pay a cost to make good on the
promise
• Therefore, incentive to renege
• Promises as veiled implicit threats: Lend me $20,
and I promise I won’t hurt you.
How to commit credibly?
• If you don’t have first-mover advantage, how do
you gain it through commitment?
• Reduce payoffs from those strategies that may
tempt you
• Remove strategies from those that my tempt you
in the future
• Transform simultaneous move game into
sequential game.
• Tie hands using third parties.
• Become irrational by eliminating strategic control
Change Payoffs
• Sunk Costs
• Establish and Use Reputation
• Reputation for unexpected value on payoffs
• Write Contracts
• International Politics?
• Prisoner’s Dilemma example
Change payoffs example: Enter or Not?
• Two firms consider market entry
• Market potential is $10 million
• Entry costs $7 million
Them
Us
In
Out
In
-2 , -2
0 , 3
Out
3 , 0
0 , 0
• It is in our interest to stay out if we think the other
firm will enter
What if we make initial investment of $1
million
Them
Us
In
Out
In
-2 , -2
-1 , 3
Out
3 , 0
-1 , 0
• Still in our interest to stay out if we think the other
firm will enter
How much to deter?
Initial investment of $3 mil?
Us
In
Out
In
-2 , -2
-3 , 3
Out
3 , 0
-3 , 0
• It is our dominant strategy to enter regardless of
what the other firm will do.
Commitment phase in Tiger by the Tail
• Show on white board
Change Moves
• Eliminate Options
• Cut of Communication
• Battle of the Sexes
• Burn Bridges
• Suntzu
• Trip wires (massive retaliation)
• Threat that leaves something to chance
• Nixon madman theory
• Kennedy Cuban missile crisis brinkmanship
• Salami Tactics
Tie Hands w/Third Parties
• Teamwork
• Alliances
• Agents
California Principle
• “Blocness ceases to be all or none; it becomes a matter
of degree”
• Territories and weapons
Deterrence vs. Compellence
Deterrence
• Deterrence aims to persuade the opponent not to initiate action. We
make the demand, explain the consequences of acting, and then wait
(success is measured by whether something happens); if the
opponent crosses the line we’ve drawn we take punitive action. One
role for jails (punishment) is to deter potential criminals. The success
of prisons is thus measured by how empty they are. It is hard to judge
whether an event fails to occur because of successful deterrence or
for other reasons. Deterrence is conservative: it seeks to protect the
status quo. It is also, like defense, essentially a waiting game: the
opponent has to move before a reaction is triggered.
Compellence
• Compellence aims to persuade the opponent to change his behavior.
We make a demand of action, then initiate our own, and continue
doing it until the opponent ceases. We can distinguish three
categories of compellence. We persuade opponent (i) to stop short of
goal; (ii) to undo the action (i.e. withdraw from land); or (iii) change his
policy by changing government. Success of compellence is easy to
see because it entails the reversal or halt of ongoing behavior. Again,
this may happen for other reasons but it is hard to avoid the
impression of doing it under duress. Compellence is active: it seeks to
change the status quo. Also, like offense, it takes the initiative and
engages the opponent until the latter relents.