How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the 'Lemons Problem'

50 Pages Posted: 27 May 2015 Last revised: 6 Jun 2018

See all articles by Adam D. Thierer

Adam D. Thierer

George Mason University - Mercatus Center

Christopher Koopman

Mercatus Center at George Mason University

Anne Hobson

Mercatus Center at George Mason University

Chris Kuiper

Independent

Date Written: May 26, 2015

Abstract

This paper argues that the sharing economy — through the use of the Internet and real time reputational feedback mechanisms — is providing a solution to the “lemons problem” that many regulations, and regulators, have spent decades attempting to overcome. Section I provides an overview of the sharing economy and traces its rapid growth. Section II revisits “lemons problem” theory as well as the various regulatory solutions proposed to deal with the problem of asymmetric information, and provides some responses. Section III discusses the relationship between reputation and trust and analyzes how reputational incentives have been used historically in commercial interactions. Section IV discusses how information asymmetries were addressed in the pre-Internet era. Section V surveys how the evolution of the Internet and information systems (especially sharing economy reputational feedback mechanisms) addresses the “lemons problem” concern. Section VI explains how these new realities affect public policy and concludes that asymmetric information is not a legitimate rationale for policy intervention in light of technological changes. We also argue continued use of this rationale to regulate in the name of consumer protection might, in fact, make consumers worse off. This has ramifications for the current debate over regulation of the sharing economy.

Keywords: sharing economy, collaborative economy, asymmetric information, lemons problem, Akerlof, online innovation, regulation, inefficiency, reputation feedback, markets, network, public interest, regulatory capture, rent-seeking, e-commerce, ride sharing

JEL Classification: D45, H7, K22, K23, L1, L2, L5, L8, L9, M2, N7, O3, R4

Suggested Citation

Thierer, Adam D. and Koopman, Christopher and Hobson, Anne and Kuiper, Chris, How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the 'Lemons Problem' (May 26, 2015). University of Miami Law Review, Vol. 70, No. 3, 2016; Mercatus Research Paper, Mercatus Center at George Mason University, Arlington, VA. Available at SSRN: https://ssrn.com/abstract=2610255 or http://dx.doi.org/10.2139/ssrn.2610255

Adam D. Thierer (Contact Author)

George Mason University - Mercatus Center ( email )

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4th Floor
Arlington, VA 22201-4433
United States

Christopher Koopman

Mercatus Center at George Mason University ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Anne Hobson

Mercatus Center at George Mason University ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Chris Kuiper

Independent ( email )

No Address Available

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