Trust, but verify: The role of ICTs in the sharing economy

Abstract

Successful peer-to-peer sharing platforms open the door to new markets by relying on feedback-driven reputation mechanisms to reduce transactions costs. In particular, the reputation-based mechanisms go a long way towards reducing informational asymmetries and opportunistic behavior. Nevertheless, they are not 100% impervious to abuse. The challenge for ICTs is to further boost trust by reducing risk while keeping transaction costs small. This can be achieved with the help of two complementary approaches: (1) develop ID verification solutions that link and aggregate a user’s reputation profiles from various communities and (2) use connected monitoring devices. Both approaches raise privacy concerns that must be taken into account. This pedagogical note offers a short primer on some of the underlying economic concepts.