Optimal risk management for the sharing economy with stranger danger and service quality

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.