I would allow turning down fights for 3 reasons:
1. Not enough time to prepare for the fight.
2. Other fighter trains in same gym and both wish to turn it down, and it isn't a title fight.
3. Opponent clearly outmatches you. Herring turning down Lesnar fight is one example (If he had done it that is). Any stand up fighter with bad ground game & sub defense turning down Fedor/Nog fight is another.
Other than that, punish the wussies. I got no idea if Rashad and Machida have turned down fights so far, but both have fought mostly cans until recently which makes their undefeated status mean alot less. Sure its also UFC's fault for not being good at marketing Machida etc. But if people turn down "risky" fights their path to title shot should be longer.
With that being said until Machida fights a top 5 guy I don't see a reason to give him a shot no matter how many UDs he grinds from lower tier fighters.