Institute of Mathematics and Informatics Bulgarian Academy of Sciences
Serdica Journal of Computing, Vol. 1, No 3, (2007), 293p-312p
The paper analyzes auctions which are not completely enforceable.
In such auctions, economic agents may fail to carry out their obligations,
and parties involved cannot rely on external enforcement or control
mechanisms for backing up a transaction. We propose two mechanisms
that make bidders directly or indirectly reveal their trustworthiness. The
first mechanism is based on discriminating bidding schedules that separate
trustworthy from untrustworthy bidders. The second mechanism is a generalization
of the Vickrey auction to the case of untrustworthy bidders. We
prove that, if the winner is considered to have the trustworthiness of the
second-highest bidder, truthfully declaring one's trustworthiness becomes a
dominant strategy. We expect the proposed mechanisms to reduce the cost
of trust management and to help agent designers avoid many market failures
caused by lack of trust.