Game Theory and Business Strategy
The Bocchicchio Family
An example of commitment using third party contracts is found in Mario Puzo's classic novel The Godfather. Those who may have only seen the film and not read the book might remember a few references to "the hostages" prior to any meetings between the heads of the families. In the book, this is described in much greater detail.
"The Bocchicchio Family was unique in that, once a particularly ferocious branch of the Mafia in Sicily, it had become an instrument of peace in America." The Bocchicchio Family is described as the most ruthless, the least amenable to logic and reason. Their simple code of vengeance did not make exception - if you harmed a member of their family, revenge would always follow. This irrationality become a limitation in America and the Bocchicchio family "knew they could not compete with their Mafia families in the struggle to organize and control more sophisticated business structures like prostitution, gambling, dope and public fraud." However, searching for an occupation in the new land of America, "the Bocchicchio Family became negotiators and hostages in the peace efforts of warring Mafia families."
Here is the basic idea. Say that Michael Corleone, the head of one Mafia family wishes to meet with Don Tessio, the head of another in order to discuss a deal for mutual advantage. The invited guest has no way of knowing if he will be safe during the visit, and Michael's promises that he will not hurt the guest cannot be believed. There is a problem of commitment here, and without some commitment, the two will not meet.
Enter the Bocchicchio Family. When Michael invites Don Tessio, he not only promises not to harm him, but also hires a member of the Bocchicchio Family to go to Tessio's house. There, the "hostage" will be guarded by Tessio's men. If Don Tessio does not return safely, Tessio's men will kill the hostage. The Bocchicchio Family, seeking revenge, will blame Michael Corleone for the death, since he made the promise that Don Tessio will not be harmed.
Now here is where the Bocchicchio Family's ruthlessness and irrationality is important. They have a reputation for revenge. They can't be bargained with. They can't be bribed. This way, Michael Corleone recognizes that breaking his promise to keep Tessio safe will result, eventually, in his own death. So, he commits to Tessio not through "cheap talk" or empty promises, but through a contract with a third party which is both credible and enough of a commitment to guarantee that the meeting will take place.