Threats Without Binding Commitment

Steven Shavell (shavell@law.harvard.edu) and Kathryn Spier

No 1139, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper explores the power of threats in the absence of binding commitment. The threatener cannot commit to carry out the threat if the victim refuses payment, and cannot commit not to carry out the threat if payment is made. If exercising the threat is costly to the threatener, then the threat cannot succeed in extracting money from the victim. If exercising the threat would benefit the threatner, however, then the threat's success depends upon whether the threat may be repeated. In the equilibrium of a finite-period game, the threat is carried out and the victim makes no payments. In an infinite-horizon game, however, it is an equilibrium for the victims to make a stream of payments over time. The expectation of future payments keeps the threatener from exercising the threat.

Date: 1995-09
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Working Paper: Threats without Binding Commitment (1996)
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