Trust, reputation and regulation: Can the new sharing economy find a way to scale?

Trust

Examples of what some like to call the “sharing economy” or peer-to-peer economy are all around us. Airbnb has rented rooms, trailers and even castles to 8.5 million people, Lyft is letting 30,000 people every week share their cars, and odd-job services like Taskrabbit are proliferating. Not everyone agrees this is a brand new economic miracle worth celebrating, however: freelance economist Tom Slee, for example — author of the book “No One Makes You Shop at Walmart” — argues that while such services work well on a small scale, as they grow larger they inevitably lose the qualities that made them so successful in the first place.

Virtually all such services, Slee notes in a recent blog post, are based on trust — and that trust in turn is based on some kind of reputation system. For example, a rating system that allows renters to rate their Airbnb hosts (and vice versa), or lets Lyft riders rate their driver. But Slee says these systems are inherently flawed because many users don’t provide an honest rating, either because they are afraid of repercussions or because they have ulterior motives.

BlaBlaCar, for example — a ride-sharing service in Europe — has accumulated millions of ratings, but the vast majority of the 200,000 or so that Slee looked at were five-star. In effect, he argues that this makes the service’s built-in reputation system essentially useless as a trust mechanism:

“With over 98% of ratings being five stars, the reputation system does not meaningfully discriminate among drivers or riders. A reputation system that does not discriminate fails as a reputation system: it fails to solve the problem of trust.”

How do peer-to-peer trust systems scale?

hand shake

A similar problem has been detected at eBay, Slee says: several studies have shown that even though an overwhelming majority of reviews and ratings are positive, the actual level of dissatisfaction is much higher — but users don’t provide accurate ratings because they are afraid of potential retaliation (since many are also eBay sellers themselves). Slee argues that this shows “even in the absence of explicit gaming, peer-to-peer internet reputation systems do not solve the problem of trust.”

As a number of other observers of the sharing economy have also argued, Slee notes that sharing your car or spare room or couch with others is not a brand new activity: all that services such as Airbnb and Lyft or BlaBlaCar provide is a more efficient way of connecting those who want to offer such services with those who require them. As he puts it: “The growth of sharing economy companies is, at least in part, a movement of already-existing social practices to online forums.”

The problem for many such services, however, is that as they grow they attract a number of things that can impede their success, including opportunists and regulatory attention — which Airbnb has been fighting for some time in a number of cities. In order to deal with those problems, Slee argues that they inevitably start to develop systems that make them less community-oriented and much more like traditional businesses, while at the same time trying to avoid regulatory scrutiny:

“To be successful, the venture-capital-funded ‘sharing economy’ will be forced to lose all those aspects of informal sharing that makes ‘sharing’ attractive, and to keep those aspects that erode neighbourhoods, erode employment rights, and remove basic standards.”

The sharing economy and venture capital

Monopoly

This isn’t Slee’s first shot at the peer-to-peer economy and the potential pitfalls it faces: he wrote earlier this year about “Why The Sharing Economy Isn’t” — in which he argued that venture investors are distorting the market — and also wrote recently about how the Omidyar Network’s venture investing is endangering the very commons-based sharing it is trying to encourage through groups like Code For America and Change.org. The bottom line, he says, is that:

“As capital and social action have conflicting goals, using markets to scale up social action can destroy the very thing that made it special in the first place.”

I think some of Slee’s criticisms, or at least his observations and questions, are worth considering. I’ve argued before that services like Airbnb and Coursera and Lyft are disrupting their respective industries in some fundamental ways, and I firmly believe that this is not only good for individual providers who work with those services — who can derive substantial benefits by sharing rooms or cars or their time — but good for the overall economy as well, in the sense that it removes inefficiency and promotes the use of surplus resources.

It’s also true that in many cases the regulatory hurdles that these services run into are designed primarily to protect the incumbents in such markets rather than users, much as critics like Paul Carr — who seems to see Uber in particular as some kind of Ayn Rand-influenced cult — would like to argue otherwise.

That said, however, I think Slee is right that trust and reputation are a crucial element of these services, and arguably the main thing that sets them apart from the more established businesses they are competing with. As they grow larger and have to implement more regulations, or move away from the peer-to-peer aspect of their service for financial or other reasons, will they lose the very thing that made them a compelling alternative to begin with?

This post was updated to note that BlaBlaCar has more than 200,000 ratings — Slee’s conclusions were based on a smaller sample

Post and thumbnail images courtesy of Shutterstock / Sam72 and Flickr user Mark Strozier

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