Intermediation in a Sharing Economy: Insurance, Moral Hazard, and Rent Extraction

Electronic intermediaries have become pervasive in sales transactions for many durables, such as cars, power tools, and apartments. Yet only recently have they successfully tackled the challenge of enabling parties to share such goods. A key impediment to sharing is a lender’s concern about damage due to unobservable actions by a renter, usually resulting in moral hazard. This paper shows how an intermediary can eliminate the moral-hazard problem by providing optimal insurance to the lender and first-best-incentives to the renter to exert care, as long as market participants are risk-neutral. The solution is illustrated for the collaborative housing market but applies in principle to any sharing market with vertically differentiated goods. A population of renters, heterogeneous both in their preferences for housing quality and with respect to the amounts of care they exert in a rental situation, faces a choice between collaborative housing and staying at a local hotel. The private hosts choose their prices strategically and the intermediary sets commission rates on both sides of the market as well as insurance terms for the rental agreement. The latter are set so as to eliminate moral hazard. The intermediary is able to extract the gains the hosts would earn compared to transacting directly. Finally, even if hotels set their prices at the outset so as to maximize collusive profits, we find that collaborative housing persists at substantial market shares, regardless of the difference between the efficiencies of hosts and hotels to reduce renters’ cost of effort. The aggregate of hosts, intermediary, and hotels benefits from a variety in these effort costs, which indicates that the intermediated sharing of goods is an economically viable, robust phenomenon.