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The Sharing Economy And Developing Countries

This article is more than 9 years old.

The tight regulation of many services industries is often justified by the existence of informational problems. For example, you don't know before a taxi cab picks you up whether they provide a good service, rip you off, how much they'd attempt to charge you, etc. These informational problems become even more severe in the case of tourists, who have even less information than residents when it comes to service industries. If a cab or a hotel offering a competitive or un-compettive price and bundle of services? With local knowledge this can be occasionally surmountable, but without local knowledge this is very hard. As a result, in service markets there has historically been a plausible argument that regulation was necessary to ensure quality, and that with taxis a regulatory monopoly might be optimal. After all, if you think the lemon problem is serious for used cars, what about for one-off services where tourists are often a large part of the audience?

What new sharing economy sites do at their core is overcome informational problems. The technology that matches drivers to riders is really important, but equally noteworthy is how quality is regulated. This technology lets customer reviews do what we previously thought tight regulations and even natural monopolies were needed to do. What I think is notable is how much more transformative these technologies should be for the developing world.

In developing countries you can find a lack a government that functions well enough to provide an effective regulatory regime. In addition, unreliable governance and weak property rights can make it hard to attract the investment required to build large companies with significant reputational capital. But a decentralized, crowd-based ratings system doesn't require lots of capital investment. It doesn't require effective regulatory bodies and good governance. It lowers the capital and regulatory bar for the existence of an effective services industry.

After all, in a country with a corrupt government, would you be more confident having a cab driver with a long list of good reviews or one with a bureaucratically issued license?

Another thing this technology provides the service sector in developing countries is to help overcome the problem of matching heterogeneous customers with heterogeneous supply. In the hotel industry the matching is between customers who are looking for a particular kind of room or house in a particular geography. With cabs the problem is matching drivers to the closest cab. Again these matching problems can be overcome with regulation or capital investments that allow larger scale businesses. But this is harder for entrepreneurs. In other words, the matching of customers to small scale providers is itself an informational problem. And sharing economy technology helps overcome it.

Because they lack other ways to overcome information problems, it's areas that lack the ability to have well-functioning regulation or large companies with good reputations that will benefit most from technology that overcomes informational problems in services. Sharing economy technology really is a huge boost in the technology of small scale service sector entrepreneurialism that allows them to overcome informational problems.

Taxi (Photo credit: Moyan_Brenn)