Bounties won't work, it's too exploitable. If you have a big bounty on you, just get your buddy to kill you while in a sidewinder. Do the same for him. Profit.
I've seen one way to make this work once: just cap the bounty at a fraction of what the killed player effectively lost, say 50%. As an example, suppose a player has a 2M bounty, and the buyback on his ship is 1M; whoever kills that player collects only 500K from the bounty (half what the killed player effectively lost, in this case his buyback), and the killed player will still have a 1,5M bounty afterwards.
In other words, the bounty would work as a contract to inflict loses on the target, with payment proportional to the inflicted loses until the full bounty was paid.