Contracting with uncertain level of trust

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Contracting with uncertain level of trust (2002)

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by Sviatoslav Braynov

Venue:	Computational Intelligence
Citations:	16 - 1 self

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@ARTICLE{Braynov02contractingwith,
    author = {Sviatoslav Braynov},
    title = {Contracting with uncertain level of trust},
    journal = {Computational Intelligence},
    year = {2002},
    volume = {18},
    pages = {501--514}
}

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Abstract

The paper investigates the impact of trust on market efficiency and bilateral contracts. We prove that a market in which agents are trusted to the degree they deserve to be trusted is as efficient as a market with complete trustworthiness. In other words, complete trustworthiness is not a necessary condition for market efficiency. We prove that distrust could significantly reduce market efficiency, and we show how to solve the problem by using appropriately designed multiagent contracts. The problem of trust is studied in the context of a bilateral negotiation game between a buyer and a seller. It is shown that if the seller’s trust equals the buyer’s trustworthiness, then the social welfare, the amount of trade, and the agents ’ utility functions are maximized. The paper also studies the efficiency of advance payment contracts as a tool for improving trustworthiness. It is proved that advance payment contracts maximize the social welfare and the amount of trade. Finally, the paper studies the problem of how to make agents truthfully reveal their level of trustworthiness. An incentive-compatible contract is defined, in which agents do not benefit from lying about their trustworthiness. The analysis and the solutions proposed in this paper could help agent designers avoid many market failures and produce efficient interaction mechanisms.

Keyphrases

uncertain level market efficiency social welfare advance payment contract complete trustworthiness agent designer many market failure buyer trustworthiness seller trust necessary condition efficient interaction mechanism incentive-compatible contract multiagent contract bilateral contract paper study agent utility function bilateral negotiation game

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