A game of changing the rules of the game: Avoiding a prisoners' dilemma by hostage commitment

A Prisoners' Dilemma only arises if the potential players fail to agree to and implement an ex ante hostage arrangement. Using a four-stage hostage-PD game, this dissertation studies when the players will reach an agreement, post hostages, choose to cooperate, and return the hostages to the initial owners. Chapter 2 examines the asset-specificity requirements on the hostages that can support cooperation. Some variants of the hostage-PD game, such as hiring a third-party enforcer and using hostages as gifts, can simplify the requirements on the hostages. Cross-ownership in corporate finance and peace agreement with a swap of lands or debts are offered as examples of the special case in which the physical exchange of hostages does not take place. Chapter 3 offers conditions that the players without the hostages initially can create the hostages in a process of reaching an agreement. Mutual cooperation will be achieved if both players are sufficiently productive in communication. Optimal degree of decentralization and homogeneity can be determined by balancing the cost of initiating communication and the cost of joining communication. Chapter 4 uses random-matching models to analyze the players' choices between communication and no communication without knowing whether they are sufficiently productive in communication. The level of social cooperation depends on the proportion of the players who are productive in the communication, the openness of the society, and the learning-by-doing effect in communication. However, a high level of spontaneous cooperation can be inefficient if the rewards for cooperation in a pair of players are taken from the players in other pairs of players. To reform such a rent-seeking society, constitutions can be redesigned, using the method of hostage exchanges, to secure the rewards for individual efforts to communicate and to strengthen the learning-by-doing in communication.