Feedback Loop Failure: Implications for the Self-Regulation of the Sharing Economy

Abstract

Thousands of rooms, houses, yurts, and castles are reserved on Airbnb each day. Soon-to-be travelers, who are sometimes thousands of miles away from their future resting places, make their selections based on host provided descriptions, pictures, and former guest reviews. The latter are essential for building trust and giving travelers the confidence they need to interact with strangers.

These trust mechanisms known as feedback loops or reputation systems are considered the “real innovation” of the sharing economy. Solving George Akerlof’s seminal “lemons problem” and leading to a world where there is a “diminished need for regulatory oversight and legal remedies because consumers [can] police misconduct themselves,” according to University of Chicago law professor Lior Strahilevitz. Indeed, Airbnb CEO Brian Chesky states “cities can’t screen as well as technologies can screen. Companies have these magical things called reputation systems...government should exist as the place of last recourse” (emphasis added).

Yet, approximately 95% of the offerings listed on Airbnb boast an average user-generated rating of either 4.5 or 5 stars (the maximum). Similarly, Uber, the peer-to-peer driving service, has indicated that only 1% of Uber drivers receive below three stars (out of five). Is it possible that all of those hosts and drivers are above average? Unlikely, even with the help of “magic.”

In recent scholarly debates concerning the regulation of the sharing economy, the accuracy of the feedback mechanism incorporated into platforms has largely been unquestioned. However, new and existing evidence from the fields of economics, management, and behavioral psychology shows us that these reputation systems might be flawed, which can lead to uniformed decision-making and consumer fraud. As they develop new ways to regulate the sharing economy, scholars and regulators must take a critical look at their dependency on reputation systems.

This Article is organized as follows. Section I briefly defines the sharing economy. Section II outlines the market failure of asymmetric information within the sharing economy and shows how scholars, regulators, and industry rely on reputation systems to correct for it. Part III demonstrates how reputation systems may be flawed. The Article concludes by offering potential solutions to address various forms of feedback loop failure. By exploring the limitations of reputations, this Article will hopefully help increase awareness among regulators of the problem and help them develop more effective regulations both inside and outside of the sharing economy.

Keywords: Sharing Economy, Feedback, Regulation