The recent transition in consumers’ consumption behavior from owning to sharing has led to rapid growth in the sharing economy. Despite the advantages of the sharing economy such as convenience and affordability, consumers’ perceived risk formed by possible physical injury from strangers or unexpected poor service quality disturbs their active participation in the sharing economy. In this paper, we develop an analytic framework for managing two different types of perceived risk associated with the sharing economy: physical risk, incurred by safety concerns, and performance risk, caused by unsatisfied service quality. Our model considers both the platform provider’s investment to alleviate the physical risk, and the effectiveness of the word-of-mouth mechanism to reduce the performance risk. We find that as the performance risk increases, the abundant word-of-mouth of the sharing platform may lead to an increase in demand, but it does not increase profit. When the physical risk increases, the word-of-mouth effect does not contribute to both demand and profit growth. Unlike word-of-mouth, the investment in safety improvement brings higher profit, along with higher demand. Furthermore, we explore three possible policy scenarios where government intervenes to reduce the physical risk, and then identify an optimal policy depending on circumstances.

Introduction

The recent proliferation of sharing economy platforms has received growing attention from both academics and practitioners. Two sharing economy platforms have recently been at the center of this interest: Airbnb, an online peer-to-peer platform providing room or home sharing service, which enables people to rent shortterm lodging; and Uber, an online peer-to-peer platform providing ride sharing as a pick-up service, which connects passengers with private drivers. These two leading platforms have been valued at $25.5 billion and $62.5 billion, respectively, despite being less than a decade old (Ramirez, Ohlhausen & McSweeny, 2016). Besides such room or ride sharing, the scope of sharing is further widening from office sharing and meal sharing, to even clothes sharing, by transferring control over transactions to consumers (Marchi & Parekh, 2015). Economic gains by saving money and time, as well as enjoyment of the activity, have played an important role in the rapid growth of the sharing economy (Hamari, Sjoklint & Ukkonen, 2015). In spite of the aforementioned advantages, this method of consumer-to-consumer transactions among non-professionals may bring up an issue of risks that the consumers perceive from participation in the sharing economy. The perceived risk, which refers to the consumers’ subjective belief of suffering a loss in pursuit of a desired transaction outcome, has extensively been addressed in the social academic domain, and more recently in the context of online transactions (Bauer, 1967; Pavlou, 2003). Since the sharing platforms are based on an online transaction, the perceived risk also resides in the sharing economy. Nevertheless, the risk management issue has been little examined for the sharing economy. In this paper, we divide the perceived risk into two types, performance risk and physical risk, and then study how to manage these two risks.