Abstract
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. An important assumption of the model is that once the threat is carried out it cannot be repeated. 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 threatener, however, then the threat's success depends upon whether the threat may be repeated after a payment is made. 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 victim to make a stream of payments over time. The expectation of future payments keeps the threatener from exercising the threat.
Highlights
Threats are often used successfully to extract money or other things of value
The threatener's strategy of carrying out the threat in the first period is weakly dominated when b = 0: The threatener would be better off not carrying out the threat in the event that the victim makes some payment in the future
The proposition characterizes a set of efficient equilibria for b = 0 where the threatener is successful in extracting a constant stream of payments from the victim, and never carries out the threat on the equilibrium path
Summary
Threats are often used successfully to extract money or other things of value. A famous historical example concerns the Vikings, who in 991 stated that they would invade and plunder the English unless tribute was paid. The threatener's strategy of carrying out the threat in the first period is weakly dominated when b = 0: The threatener would be better off not carrying out the threat in the (offthe-equilibrium-path) event that the victim makes some payment in the future.
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