the Future of Change

This year’s World Cup, in addition to exhibiting many extremely tight games, and one extremely embarrassing blowout, was a showcase for the growth of the “sharing economy”: peer-to-peer, web-based platforms that allow individuals to sell products and services to others.  Through just one of these sharing economy platforms, airbnb, a pioneer in the sharing economy, roughly 120,000 people rented rooms in homes in Brazil to watch the games.

The key hurdle for any sharing economy hub is its ability to develop trust between sellers and prospective consumers.   According to Nobel-prize winning economist Kenneth Arrow, “[v]irtually every commercial transaction has within itself an element of trust.”  Few transactions exhibit the importance of trust like those that take place in the sharing economy.  Outside most systems of regulatory oversight, these transactions function almost exclusively on trust.  Indeed, renting of rooms, lending out cars, accepting a ride in a car with a stranger, which are all effectively beyond the watchful eye of government: these are transactions that require trust.  And the sharing economy is finding ways to develop this trust among its participants.

In order to create this trust, these sharing economy platforms are looking to replicate the “reputation markets” of small towns that help keep predatory conduct in check. In such close-knit environments, individuals who trust each other, who can engage in face-to-face communications, and who often have personal experiences with businesses in the community, can share information about such businesses.  Car service companies like Lyft and Uber are using this type of peer-to-peer communication to create an average score for their drivers.  This score is generated by users after they complete a ride.  If a driver falls below a certain average score, he or she is no longer able to accept rides through the platform. Some platforms are taking similar steps—like asking customers and providers to link their respective Facebook pages—to give participants a window into the lives of their prospective business partners.

One company, Turo (formerly RelayRides) a car sharing platform, with networks across the United States, including the possibility of making car sharing connections in many major airports.   Turo is attempting to replicate a reputation market by taking face-to-face communication one step farther.  The company has learned how to bring users and producers together so that they can create a personal connection before engaging in economic relations.  The company’s CEO Andre Haddad, quoted in a recent article in Wired Magazine, explains how Turo learned how to create a bond between those who are lending out their cars and those who would borrow them: they had them meet face-to-face.  According to Haddad, “[t]hey really liked that human connection.”  Face-to-face interactions such as these help to lower social distance and create trust.  “People strike up a conversation and realize they have something in common, which boosts trust and makes people feel accountable,” says Haddad.  “They are going to have to return this car to that person and look them in the eye.”

Even in a global economy, trust is still central to economic exchange.  Platforms in the sharing economy are looking for ways to embed trust within their networks of producers and consumers.  These systems are not perfect, and predatory conduct still exists, but the expansion of the sharing economy will depend on its ability to replicate that small town reputation market on a global scale.  The success of the market in doing so to date bodes well for its continued growth as well as the exploration of new markets and sectors where sharing can occur in effective and mutually beneficial ways.