Platform-mediated Reputation Systems in the P2p Economy and Incentives to Provide Service Quality

Abstract: In the P2P economy (or ‘sharing economy’, or ‘collaborative economy’), platforms generally use reputation systems to actively perform a ‘regulatory’ role, in particular by exercising the power to exclude from access to the platform users whose online rating/reputation falls below a given threshold. The paper aims to analyse through a theoretical model the effect of the design of this specific type of online rating system on users/providers’ incentives to ensure a high level of service quality. We propose that users/providers’ incentives to provide service quality can be analysed as an optimal choice problem with a two arguments utility function, where reputation can be considered as an independent variable in the list of arguments of users/providers’ utility function. We find that current P2P reputation mechanisms are not incentive compatible because of the joint existence of two features: (1) they involve price/earnings insensitive to performance; and (2) reputation is not portable across platforms, so that users/providers can switch continuously among different platforms. In presence of these two conditions, the structure of users/providers’ inter-temporal preferences may create incentives to deplete their reputation according to their rate of substitution between income and reputation, as long as they can relatively easily switch to a different platform. Indeed, users/providers may choose a dissipative (so-called ‘bang-bang’) strategy involving the depletion of reputation and the jump to a different platform. This suggests that the design of P2P reputation systems may be improved either by making earnings dependent on performance or, alternatively, by making reputation portable across platforms.