What is enforcement used for?

• Enforcement mechanisms make people comply to rules.
• In transactions between parties there is the inherent risk of opportunistic default → if i am not enforced, i would take a money but not send an item
• Agents are willing to destroy “part of cooperative surplus” to secure a larger share of it → Russian politics

What types of enforcement exist?

• Formal enforcement: Formal contracts and filing (expensive) suits. Example: Youtube bans a channel for rule violation
• Informal enforcement: Social pressure and reputation. Personal enforcement and community inforcement are subtypes of informal enforcement.
  • Personal enforcement: Cheating triggers retaliation by the victim. Violator is sanctioned by victim. Example: repeated game with the same parties long term relationships
  • Community enforcement: Violator is sanctioned by other members of the society. Example: reputation mechanisms

Name an application area in which enforcement is used.

• Formal enforcement: car traffic regulation
• Informal, personal enforcement: collaboration of big bloggers
• Informal, community enforcement: reputation on Amazon

Give an example how enforcement can be applied to internet auctions by means of establishing trust.

• Prevent sellers from lying: reputation systems of sellers
• Prevent buyers from bidding and not paying then: disqualification from auction

What kinds of enforcement are applied in practice?

• Reputation systems are informal comunity enforcement

What are entry fees?

• Sellers need to pay a fee before they are allowed to trade.
• If they do not deliver at any point, exclude them from market and keep fee

What problem is solved by the application of entry fees?

• If entry fee larger as potential fraud profir, frauds will be not commited

Why are entry fees not used?

• It must be non economic considerations: even truthful sellers can have a fear or do not trust a platform → less sellers → market dies
• More complicated sign up for sellers
• Most efficient mechanism

How can the information quality of reputation mechanisms be improved?

• Airbnb had a problem: high rating of all hosts, because of reciprocity the hosts and guests rate each other always high
• Airbnb solved it: now reviews are only published once both the host and the guest have submitted their
• Find side effects in ranking system (social, psychological, cheating) and eliminate it without creating additional pressure on users.

Name two ways to create trust in Internet transactions

• Reputation System
• Entry Fees

What are three viewpoints on enforcement?

• Computer Science: Tends to create trust inducing mechanisms. Protocols, Sertificates, Tokens, Authorities, implementing of formal enforcement. Likes to quantitatively measure trust according to (arbitrary) parameters. → How to build metrics and create rules
• Economics: assumes the trust, but does not measure it. Focus on how trust effects the economic behavior of a system’s users and the system itself. → How trust effects the ecomomic
• Sociology: studies the fundamentals of trust and investigates aspects such as the evolution of trust over time. → Why do people trust