Public Affairs Forum
March 11, 2015
An interview with Arun Sundararajan, Professor, Information, Operations, and Management Sciences
New York University Leonard N. Stern School of Business
What is the sharing economy?
My name is Arun Sundararajan. I am a professor at New York University. What I think of as the sharing economy is something that is very commercial—rooted in marketplaces, rooted in exchange. The second dimension of the sharing economy that seems to reoccur is it enables people to shift away from a model where they have to own something in order to be able to derive value from it and toward a model where you can access something without actually owning it. And the third dimension of the sharing economy has to do with a move away from us getting stuff from companies or institutions and toward us getting stuff from each other, mediated by peer-to-peer markets.
What are some peer-to-peer markets?
There are a number of different peer-to-peer markets that have emerged over the last five years. Perhaps the best known are Airbnb for peer-to-peer, short-term accommodation; Uber, Lyft, and Sidecar for point-to-point urban transportation and a car driven by someone else; GetAround and RelayRides, which allow you to rent someone else's car; BlaBlaCar and carpooling that allow you to get a ride in someone's car from one city to another. There's StyleLend that allows you to rent someone else's apparel or accessories. There's LendingClub and Funding Circle that allow people to lend each other money. There are Kickstarter and Indiegogo that allow people to donate to other people's projects. The scale of peer-to-peer seems to have exploded dramatically in the last few years.
Which assets are best suited for the sharing economy?
Assets that are low usage and high value tend to be the ones that are best suited for the sharing economy. So, for example, a car which costs a lot of money and you don't use it much, [or] your house—even though you use it a lot, the little time that you're not using it, the value of the asset is so much that it lends itself well. On the other hand, assets that you use a lot, like your mobile phone, that is unlikely to become a sharing economy product because you need it all the time. Assets where you get value from the mere act of ownership—something that shapes your sense of self because you own it, something that has sentimental value. I think of that as ownership value. Over there, I don't expect much of a transition. On the other hand, assets where there's a lot of consumption value, where you don't really care about possessing the asset. You just want to have it when you need it. You may not gain too much value from owning a $10,000 Rolex, but you want to be seen wearing it and maybe you want to be seen wearing different ones. So I think that's a sector which lends itself well to sharing economy consumption.
What is the role of trust in peer-to-peer marketplaces?
I think the role of trust is central in mediating peer-to-peer marketplaces. I think the reason why we have seen this recent explosion in the sharing economy has to do with a lot of digital trust infrastructures coming of age. Twenty years ago, when eBay started, they laid the foundations for digital trust by inventing the online feedback systems that allowed us to learn from the experiences of others. And that seemed to provide enough trust when we were sending packages containing goods to other people. But what's emerged more recently are a wide variety of other signals of "I am a good person," "I am a real person," "I can be relied on," including systems that allow you to prove that you have a particular form of government ID. Connections to your Facebook or LinkedIn network, which provide proof of real-world social capital. Even things as innocuous as having a mobile phone, which sort of provides evidence that you have gone through some sort of screening process conducted by someone else.
There are certain contexts in which people want to transact with other people like them or who share the same value system as them, [such as] auto club memberships [or] "I belong to the rotary club." These are central to the high-touch, high-stakes kinds of interactions that we're seeing in peer-to-peer marketplaces now, like getting into a stranger's car and saying, "Drive me to another city."
Can peer-to-peer work for B2B?
There is a lot of this kind of activity already in the business-to-business community. A vast majority of manufacturing of different things are outsourced to specialists who are using shared capacity to fulfill the manufacturing needs of a wide variety of companies. I think the opportunities arise, for example, in like the federal government has a wide variety of automobiles and other vehicles that may be underutilized. They could set up a sharing economy–like marketplace, to increase the efficiency with which they use those assets. Funding Circle, which is a peer-to-peer loan marketplace. A significant fraction of the customers there are small businesses who are looking for a loan. So, there already is a significant amount of business participation in the peer-to-peer economy, but I think that there is room for growth in the small business sector.
What is government's role in the sharing economy?
As peer-to-peer exchange becomes an increasing fraction of our economy, local governments will find that they have to be supportive of and inclusive of this kind of peer-to-peer exchange, in order to enjoy greater levels of economic growth. I think a larger and larger fraction of work will happen through peer-to-peer marketplaces rather than full-time jobs. As a consequence, local governments that allow their citizens to participate as suppliers in peer-to-peer marketplaces are going to see faster rates of growth and work, and more healthy employment. The benefits that seem to be coming from these peer-to-peer marketplaces are disproportionately enjoyed by below-median-income consumers. And as a consequence, local governments can see encouraging the sharing economy and peer-to-peer marketplaces as a strategy for inclusive growth.
The challenges that arise come from the fact that, unlike digital disruptions of the past where it was all in the digital realm, these peer-to-peer marketplaces are disrupting real-world services—familiar services, services that already had a preexisting form of supply, like hotels for short-term accommodation, taxis for point-to-point transportation. And as a consequence, there are existing regulations that have been put in place to support providing the services the old way—the analog way, so to speak. A challenge for local governments is in coming up with transition plans as the economy moves away from this old form of providing accommodation of transportation and toward these new forms.
Another challenge, which is related, comes from the fact that the peer-to-peer marketplaces are blurring the boundaries between personal and professional in the provision of commercial services. It used to be either you were a taxi driver full-time or you weren't. Maybe you would take your friend's kids to baseball practice periodically, sometimes you'd lend your apartment to a friend, you'd have people over for dinner—but we didn't feel there was any need for special licensing there. That was personal. Professional providers had to be licensed and regulated in certain ways. Now we are sort of blurring the lines between the personal and the professional, and I think that's at the heart of a lot of the regulatory challenges that cities and states are facing when trying to accommodate the sharing economy.
Will peer-to-peer markets dominate our future economy?
Whether or not the sharing economy is going to dominate the economy, how much it will grow, whether rental is going to become all-encompassing—the answer to those questions is in part dependent on the industry that you're talking about. For example, I think that point-to-point urban transportation, or taxi-like service, will be dominated almost entirely by the new peer-to-peer marketplaces. On the other hand, I fully expect that Airbnb and hotels will coexist. Hotels have a special place in a lot of consumers' hearts. They are familiar to a lot of consumers and are superior alternatives to Airbnb for certain kinds of business travel. I also think that it will take at least a generation for us to move away from associating ownership with our own sort of personal economic development. I don't think that we will transition completely to a rental economy. People like to own stuff. What's going to transition is where you don't necessarily want to own it, but the only way that you can use it is if you own it. Hopefully, we will transition to an economy where you don't have to have 50 power tools of different kinds in your tool shed, and instead we transition to a place where you can rent it fluidly, or borrow that fluidly, or share it fluidly with your neighborhood.