Incentive-Compatible Trust Mechanisms

Trading goods online has numerous advantages. One that is particularly compelling is that online merchants can offer their goods at lower prices compared to their offline counterparts. The physical distance between buyers and sellers, however, also leads to problems of trust. Consider the online auction site eBay as an example: its procedure is such that the winning bidder (henceforth the buyer) first pays for the good and that the seller is required to send the good only after receipt of this payment. Without any trust-enabling mechanisms in place, the seller is best off keeping the good for himself, even if he received the payment. Since a rational, self-interested buyer can anticipate this, she will not pay for the good in the first place and no trade takes place. This trust problem is usually addressed by a reputation mechanism that publishes buyer feedback about a seller’s past behavior [e. g., Dellarocas, 2006]. Reputation mechanisms, however, critically rely on assumptions that are rarely met in real-world marketplaces: first, it is assumed that buyers honestly report their private experiences. Second, it is assumed that the seller cannot whitewash, i.e. create a new reputation profile once an old one is ran down, and, third, it is assumed that the seller is long-lived, i.e. that he will continue to trade on the marketplace indefinitely. Consider eBay as an example for a real-world market again. From a game-theoretic point of view, the assumption of honest buyer feedback is problematic for two reasons: first, since reporting feedback is time-consuming and thus costly, a buyer has no incentive to leave feedback at all. Second, when feedback is published, there are ample incentives for manipulation, such as a competitor degrading a seller’s reputation profile to push him out of the market. The assumption that sellers cannot whitewash is equally difficult to uphold since it is easy to create a new identity and start anew. Lastly, not all sellers are long-lived which—together with the whitewashing problem—creates a situation where new sellers cannot enter the market. In my thesis, I design incentive-compatible trust mechanisms that do not rely on any of the aforementioned assumptions. Moreover, I focus on designs that minimize common knowledge assumptions with respect to the players’ valuations, costs and beliefs.