To achieve the best outcome for all involved, it is desirable to increase the likelihood of cooperative behavior in decision-making situations that interact. In repeated interactions, good experience can promote confidence in cooperative behavior. However, even good experience with previous transactions does not preclude a partner from defecting in the future. One proven way that increases confidence in future cooperative behavior is self-commitment. Participants in mutually influential decision-making processes can signal security through self-commitment and thereby enable or encourage cooperation. Self-commitment can be communicated credibly through reputation-building measures.
For example, a fund manager can signal that he will never invest in the arms industry or only in companies with an ecologically and socially sustainable business model.
But a company can also signal that it will go bankrupt if a dependent customer does not accept a price increase or a reduction in payment terms.
In the first case, self-commitment can attract additional investors and strengthen the fund. In the second case, the firm would force cooperation through its threat.
Self-commitment can promote cooperation in both simultaneous and sequential decision situations, but it can also, if misconstrued as a bluff, bring about disaster.
It has already happened that threatened military strikes were taken as a bluff and subsequently triggered wars.
In repeated games, the participants face the challenge of sticking to their given self-commitment. Breaking the self-commitment may provide short-term advantages, but it will lead to disadvantages in the long run, i.e. in further rounds of the game. The reason is the reciprocity of effects. Broken trust leads to loss of reputation and loss of cooperation gains for all parties involved. In the extreme case of complete mistrust, the partners’ interactions must be limited to strictly controllable simultaneity of corresponding actions. Where even trust in smaller move-by-move interactions is lacking, trustees can help.