Ransom payments are a secret of Polichinelle. Nobody knows much money exchanges hands for the release of hostages every year. Reliable data is impossible to find, as all governments officially deny paying them. However, from time to time ransoms get paid (sometimes with cash carried through the dessert) and hostages get released.
There is a number of organisations and groups who have been kidnapping Westerners for profit – Somali pirates, Al-Qaeda, and ISIS are the most infamous. The amounts can range from hundreds of thousands to hundreds of millions of dollars.
Game theory can shed some light on the game-like nature of ransom payments exchanges. One game, the one we hear about the most, is played at the level of the hostage takers and potential ransom payers. Once a person is kidnapped, their government or family can get involved and negotiate with the kidnappers. Asymmetry of information is rife: hostage takers often provide proofs of life to demonstrate that the hostages are still alive.
Another game, one that is seldom discussed, involves different ransom payers. On one side there is the American and British government, and other governments committed to not negotiating with terrorists and never paying ransoms. When James Foley, an American journalist, was taken hostage, his family was threatened with persecution if they tried to raise the funds and pay the ransom independently of the government. The ransom was never paid and James Foley was beheaded by ISIS in August 2014.
On the other side, there are many continental European governments, including France and Germany, who deny paying ransoms, yet find the ways to transfer money to the hostage takers to assure their citizens’ safe return. Nicolas Henin, a French journalist shared a cell with James Foley when in ISIS captivity until his release in April 2014. Upon Henin’s return to France, Francoise Hollande assured him that France did not pay his ransom, yet French taxpayer’s money did reach ISIS. Strictly speaking, these countries’ governments do not make the transactions. Instead, they disguise the money as humanitarian aid or other payments, and they send their representatives or proxies to the areas held by hostage takers.
The fact that the the returns of continental Europeans are so frequent, a has made it pretty clear that European governments’ threats are not credible. “Your governments always say they don’t pay,” [a guard] told Ms. Mariani [an Italian captured in Algeria] “When you go back, I want you to tell your people that your government does pay. They always pay.”
The interaction, or lack there of, between the two groups of players resembles the prisoner’s dilemma, the most famous game theory problem. Each group of players has two options: to pay or not to pay ransom for a hypothetical hostage. Paying ransom involves a relatively small monetary cost to the government and proportionally greater political appraisal, as the hostage returns home. Not paying ransom involves the death of the hostage, and therefore some amount of political outcry.
However, when both players never pay ransoms, the benefit to governments is vast: no hostages are taken, and no money has to be paid. This is debatable, yet it is reasonable to assume that that the number of hostages taken would decrease, if not diminish, if for a prolonged number of years all countries of the world credibly promised not to pay ransoms. Terrorists would find it pointless to waste their energy on hostages and they would look for other sources of revenue. When both groups of players pay ransom, an inefficient situation arises, as hostage taking is endemic and governments have to incur monetary costs.
Economic theory predicts this inefficient outcome, labelled as Nash Equilibrium. This is because in a one-off game, a government would prefer to have their hostage return home. Promising not to pay is not credible, as the immediate gain from paying is greater, keeping the other government’s action as given. Yet what seems to be happening is that the two groups of countries’ strategies are asymmetric, and we have not even reached the inefficient equilibrium. Instead, the US and Britain keep incurring “losses” (of hostages), while Europe keeps incurring “gains” (of having their citizens safely return home).
This asymmetry in responses is baffling. On one hand, it stops at least some of the money flow to terrorists. This is important, as according to some older data at one point ransom payments made up about a half of Al Qaeda’s budget. On the other hand, it causes political dissatisfaction in the US. In fact, in June 2015 President Obama promised to no longer threaten the families of hostages not to pay ransoms, which means the US is moving closer towards the inefficient Nash Equilibrium.
Sadly, hostage taking is still prevalent; two months ago, armed militants kidnapped four Westerners from a Filipino resort. Games played between governments are not one-off; in fact the strategies of players matter even more in the dynamic setting. The streams of cash flowing to terrorists’ pockets only perpetuate conflicts abroad, creating an infinite stream of difficult choices for Western governments.