Bounty hunting just aint gonna work as long as players have no reason to avoid death. If I was hunted, I'd just strip my gear and agree a place to meet my killer, get killed and then share the bounty with him.
It could also work like this. Bounties placed on players by players and paid for by players. If a player wants to hunt down a bounty, he asks the bounty hunter official for either a high (4000+caps) priority, medium (1000+ caps) priority or low (Under 1000 caps) priority bounty. High priority bounties are the highest paying bounties, low priority are the lowest and medium's payout is medium. The assignment is random so you cannot choose your friends and what not so abuse in that sense is impossible (unless by coincidence). You have to kill your target within 24hrs with low priority, 12 hours medium, 6 hours high. When you kill your target, you are given an ear/finger to take back to the bounty hunting agency. Basically, anyone with that ear/finger has the rights to the bounty prize. If you drop it, someone could claim your prize.
I don't see how that will change anything. If Billy makes a bounty against Karl, then Jimmy (Karl's friend) could still kill Karl and Karl will come right back, and they share the money.