Commitments and Credibility

1. Commitments and Credibility

2. 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.

3. Tiger by the tail extensive form (1,4) Bite Tiger Let go ~Bite (4,2) Boy Hold (2,1)

4. Tiger by the tail extensive form (1,4) Bite Tiger Let go ~Bite (4,2) Boy Hold (2,1)

5. 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

6. 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

7. 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

8. 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 pre-committing to a response rule (conditional move: if you do x, then I will/will not do y)

9. 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

10. 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.

11. 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

12. Change Payoffs • Sunk Costs • Establish and Use Reputation • Reputation for unexpected value on payoffs • Write Contracts • International Politics? • Prisoner’s Dilemma example

13. Change payoffs example: Enter or Not? • Two firms consider market entry • Market potential is $10 million • Entry costs $7 million • It is in our interest to stay out if we think the other firm will enter Them

14. What if we make initial investment of $1 million • Still in our interest to stay out if we think the other firm will enter Them

15. How much to deter? Initial investment of $3 mil? • It is our dominant strategy to enter regardless of what the other firm will do.

16. Commitment phase in Tiger by the Tail • Show on white board

17. 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

18. Tie Hands w/Third Parties • Teamwork • Alliances • Agents

19. California Principle • “Blocness ceases to be all or none; it becomes a matter of degree” • Territories and weapons

20. Deterrence vs. Compellence

21. Deterrence • Deterrenceaims 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.

22. Compellence • Compellenceaims 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.