Adverse Selection in the Sharing Economy:

Understanding the Impact of Digital Work Intermediation

June 7, 2019
Managerial Accounting Final Report

Professor HWANG Iny

Seoul National University

Department of French Education

KIM Ki-Baek
2013-12501
Table of Contents

Introduction

I. Background Research
1.1 What is the Sharing Economy?
1.2 Sharing Economy as a Solution to the Lemon Market
1.3 Phishing Equilibrium in the World of Sharing Economy

II. Adverse Selection in Uber

2.1 Overview of Uber’s Ride-Hailing Services
2.2 Information Asymmetry between Uber and Uber Riders
2.3 Information Asymmetry between Uber and Uber Drivers

III. Implications
3.1 Reputational Feedback Mechanism as a Performance Indicator
3.2 Power Imbalance and Exploitation

IV. Solutions
4.1 Portable Ratings and Dual Reputation
4.2 Making the Platform More Transparent
4.3 Employment Contract and Fixed Remuneration

Conclusion

Bibliography
 Introduction

The free market does not always operate perfectly due to market frictions such as information
asymmetry. People possess different information, and when buying goods, the buyer may not have the
same depth of information as the seller. Consequently, in transactions, market agents face the difficulty
of distinguishing high quality products from low quality products. Such disparity in information
between producers and consumers may result in moral hazard problems, where the better-informed
agent could distort other’s judgement, either by intentionally making up information to mislead the
buyers or by nudging people through emotional and cognitive biases. Akerlof and Shiller (2015) point
out that such deception and trickery are inherent in all transactions of modern economy because there
is a phishing equilibrium where the better-informed would always outperform the uninformed. Their
idea is supported by anecdotes of informational imbalance from various fields: high finance, tobacco,
medication, liquor and even politics.
As society develops and experiences technological breakthroughs, the general public is exposed to
new types of markets. This text will expand the scope to a new area of economy – the sharing economy,
also referred as gig economy. A number of scholars highlighted the sharing economy as a solution to
the information asymmetry in the market. They argued that an Internet-based service and its reputational
feedback mechanisms would reconcile the discrepancy in information availability among market
participants.(Thrierer et al. 2016) Nevertheless, there too is an unnoticed phishing equilibrium in the
realm of sharing economy and it may bring a greater range and complexity of dangers. Such adverse
consequences of the information asymmetry are especially observable in one form of sharing economy:
ride-hailing. The paper will focus on the case of Uber Technologies Inc., to see how the company uses
its digital platform as a market intermediary to monitor and nudge its users. As one of the pioneers and
the most successful players of the sharing economy, the ride-hailing company became the highest valued
tech unicorn since Facebook and Alibaba. Unfortunately, on the other side of the coin remain groaning
Uber drivers who are constantly manipulated by the cognitive biases created by the firm.
This paper is composed of four parts. Part I will define the concept of sharing economy and refer to
an existing literature to see how sharing economy platforms can overcome information asymmetry.
Later, the information asymmetry inherent in a platform economy will be presented. Part II will
elaborate the information asymmetry problems from which both Uber drivers and riders are suffering.
Part III will present the caveats of the Uber example and finally, part IV will discuss possible solutions
to tackle the adverse selection in the sharing economy.
I. Background Research

1.1 What is the Sharing Economy?

The term “sharing economy” does not yet have a consensus definition. Still, Botsman and Rodgers
(2010; as cited in Sundararajan, 2016) explain the underlying idea behind the concept is that people
consume underutilized assets in a “collaborative” manner, which includes people using the internet to
connect each other and create peer-to-peer interactions. Alex Stephany (2015; as cited in Sundararajan,
2016) defines it as the value created through exploiting underutilized assets by making them accessible
online for a community to use it and ultimately reducing the need of owning the asset. The sharing
economy is also referred as gig economy, because most workers usually consider it as a temporal job
for some extra income, or on-demand economy, as the tasks of the work is based on the requests of the
customers. Some people consider the terms as distinguished concepts due to the focal difference, but
this paper will use the terms under the assumption that the three terms are interchangeable.
Sharing economy firms’ services are generally based on an online platform or a software app. The
platform itself became a digital market intermediary which connects individual suppliers and consumers
through digital transactions. Since 2016, these sharing economy platforms have grown at an
accelerating pace, and are expected to grow to $335 billion by 2025. (FTC, 2016) According to
O’Connor (2016), the sharing economy platforms earned the spotlight as their use of the internet
facilitated transactions between produces and sellers. Airbnb facilitates the renting of assets and Uber
facilitates the sale of labor. These firms are often referred as disruptive innovators as they have
penetrated sectors by threatening the incumbents. Transportation services, represented by Uber and Lyft
are gradually replacing the traditional taxi industry. Services provided by hotels are losing its shares to
short-term lodging services such as Airbnb. Today, Uber and Airbnb became the tech unicorns
representing the Silicon Valley.
The rising popularity of sharing economy has an important implication. Sundararajan (2016)
emphasizes that one of the core characteristics of the sharing economy is that the supply of labor comes
from ‘decentralized crowds’, which stands for individuals who are not affiliated to any corporate
aggregates. This characteristic has radically changed the way people transact. People are now willing
to ride a stranger’s car without any doubt or live in a resident with an individual that they have never
met before. Such trends seem rather counterintuitive considering that people are normally taught not to
follow strangers. Today, people are trusting these strangers, and trust became a necessary condition
which runs the whole sharing economy business. Consequently, an information gap would directly
affect the trust between related agents.

1.2 Sharing Economy as a Solution to Information Asymmetry

Certain scholars have voiced that the sharing economy platforms which work on Internet-based
mechanisms could become an effective solution to information asymmetry. Thierer et al. (2016: 858)
suggests reputational rating systems may decrease information asymmetry and thus replace regulatory
laws. Steckbeck and Boettke underlines that the market could overcome adverse selection by employing
reputational feedback mechanisms because, when transaction costs exist, reputational information
could lead to rewarding honest producers and punishing deceiving producers (as cited in Thierer et
al.,2016:845) Reputational feedback mechanisms in general have lowered buyers’ acquisition costs of
information needed before going through a transaction. The lower costs of making decisions and
gathering information would stimulate more economic activity. This mechanism along with the advent
and the development of Internet contributed to narrowing down the information gap between buyers
and sellers through forms of online reviews and ratings, etc.
Thierer et al. (2016) highlights that the sharing economy platforms would play a critical role in
alleviating information asymmetry by enhancing trust among market agents and constraining
opportunistic behavior of individuals. Existing methods of reputational feedback in the Internet are now
transplanted to the sharing economy platforms. Furthermore, sharing economy platforms and
technological changes brought in more sophisticated measures such as peer-to-peer mechanisms. For
example, Airbnb, Uber, Lyft and multiple platforms obliges its users to share information that confirms
an individual’s identity and there by reinforces the reputational ties between platform users. These
feedback mechanisms increased buyer’s satisfaction and even resulted to less fraud during digital
transactions. They are expected to ultimately ameliorate the welfare of both consumers and producers
compared to the past.

1.3 Phishing Equilibrium in the World of Sharing Economy

Despite all the praises towards the trust enhancing mechanisms, the proponents of the reputational
feedback mechanisms overlook an important caveat. A phishing equilibrium still persists in the sharing
economy. The voluntary transaction between the buyer and sellers does not necessarily make both
agents better off and feedback mechanisms are rather exploited by the platform to exercise leverage on
related parties.
One of the underlying assumptions of previous literatures was that a buyer or a seller has strong
incentives to deceive another agent with limited information, and to prevent this, a reputation feedback
mechanisms managed by a sharing economy platform will constrain the moral hazard of individuals by
decreasing transaction costs. However, the transactions in the sharing economy must not be interpreted
identically to the conventional buyer and seller relationship. The transaction dynamics of sharing
economy platforms are much more complex. A major distinguishing feature of the sharing economy is
that the transaction usually takes place in multi-sided markets. In case of the ride-hailing industry in
general, three parties are involved in transactions: 1) drivers, who are workers constantly looking for
riders, 2) riders, who are requestors searching for available rides and most importantly 3) the platform,
which is the matchmaker which fulfils the need of both the drivers and riders. An important point to
make is that since there is heterogeneity among these parties, information asymmetry is observable in
multiple directions.(FTC, 2016:32) In a ride-hailing service, the platform will have the most information
as they possess information on both passengers and drivers.
Platform is not a panacea to severe information asymmetry problems as certain scholars perceive.
Platform-mediated interactions have potential for adverse selection and intentional concealment of
information. The disparity in information accessibility gives platforms the incentives to manipulate and
nudge the workers and requestors to their own advantage. Eventually, platforms will produce market
inefficiency and impact work quality. (Kingsley et al, 2015) A serious degree of adverse selection is
virtually inherent in the sharing economy because transactions itself are impossible without platforms.
Furthermore, Calo and Rosenblat (2017) found out “sharing economy firms, which observe in detail
the activities of all participants under the scaffolding of an app, have both the means and the incentive
to engage in complex techniques of self dealing.” Consequently, the focus should move from the
relationship between workers and requestors to the opportunistic behavior of the platforms.
A striking example of adverse selection in the sharing economy can be observed from Uber. The
company exploits its superior knowledge and algorithms to distort the decisions of the market agents
and avoid responsibility of the consequences that are drawn by inefficient choices. The examples in the
next section will elaborate how information asymmetry in online platform-based transactions damaged
the users.

II. Adverse Selection Observed in Uber

2.1 Overview of Uber’s Ride-Hailing Services
Before discussing the specific examples of information asymmetry, we must go over some details of
the ride-hailing company itself and how its service operates to have a better understanding of the way
the platform and the algorithm hurts its users. In cities with Uber drivers, individuals could order a ride
by simply touching a request button in the software app. Once the passenger chooses a desired pick-up
location, the platform will connect the requestor with an available driver nearby the location. After a
few seconds of matching process, the app shows the passenger the information of the assigned Uber
driver (name, age and overall customer rating included), the estimated fare and expected duration of the
ride. Both the driver and passenger must accept each other’s request, and then the passenger would see
the assigned Uber driver’s real-time location marked as a black ball on the map provided by the app.
When the ride begins, the algorithm of the platform will automatically decide the route to the destination.
After reaching the location, the passenger could simply leave since the ride fares will be automatically
paid through the app with the passenger’s credit card information. The platform will take 20-25% of
the total fare as a commission. When the drive is over, both the driver and passenger are required to rate
each other from a total score of five stars and these results will be displayed to future users of the
platform. Drivers must obtain and maintain an overall score higher than 4.6 to remain as an Uber driver.
The typical ordering process does not seem to be problematic to both drivers and passengers, but
inside the platform, there are psychological nudges that could influence the service users when making
decisions. Basically, Uber, with the vast knowledge of drivers and passengers, nudges passengers to pay
for more and drivers to work for less. (Calo and Rosenblat, 2017:1650) As information asymmetry runs
to both riders and drivers, examples related to both parties will be discussed throughout the section.

2.2 Information Asymmetry between Uber and Uber Riders

Numerous Uber riders have reported that they feel being deceived by the platform. This is because
passengers do not have the information on two essential factors of the ride-hailing service: availability
of nearby drivers and the fares of each ride. As passengers lack these two information, they end up
making inefficient decisions.
One of the most reported cases from passengers is the “phantom cars” or “ghost drivers” presented
in the software map. (Calo and Rosenblat, 2017) When a user enters the application, a GPS map of
where he or she is located appears on the screen. There also would be several black balls on the screen
moving around the user’s location even before making a request. A typical consumer perceives these
black balls as real-time locations of Uber drivers who are close by. After perceiving that there are several
active drivers in the neighborhood, consumers would order a ride, expecting that they would be picked
up as soon as possible. Nevertheless, the algorithm of the software would connect the passenger with
an available driver who is in fact far away from the location. Eventually, the passenger must wait for a
longer time to take the ride. According to Uber, the moving black balls on the screen are not real-time
locations of Uber drivers, but only mere visual aids which explain how the service operates. Consumers
would be deceived by these black balls that appear from the beginning because they are identical to the
black ball that consumers see after accepting a ride request. These black balls successfully formed a
cognitive bias and lead passengers to make an order. This is an example of how a platform could create
market inefficiency through digital market manipulation.
Another problem arises because passengers do not have sufficient information on the price of a single
ride. It is difficult for passengers to estimate the exact fare of their ride because it is the algorithm which
gives out the expected final price when passengers make an order. The real problem surfaces because
Uber fares would differ dramatically depending on time and demand without any notifications.
Nevertheless, passengers cannot calculate the price surges by themselves and could not know the real
reason behind the fare increase. All the pricing is done by the algorithm after taking into account the
real-time demand level. The final price is justified only because the algorithm calculated it, and
customers have no choice but to accept the price. Even worse, there are customer reports that the Uber
discriminates prices by considering consumer information. The platform’s software app has access to
the customer’s phone status and thus, it is speculated that the platform discriminates prices through user
analysis— passengers with low phone batteries tend to pay more than other passengers.
 2.3 Information Asymmetry between Uber and Uber Drivers
The Uber drivers are the biggest victims of adverse selection in the ride-hailing service. The platform
blocks drivers from accessing valuable information which would help them make profitable decisions.
Drivers would only gain access to key information after they accept a ride request In fact, the three
situations elaborated by Rosenblat and Stark (2016: 3762-3777) present how Uber removes drivers’
free agency with the platform’s information advantage.

1) Blind Passenger Acceptance

While riders acquire information on their assigned drivers and fares before confirming the ride,
drivers are not shown the destination of the passengers nor the information on expected revenue before
they accept the ride. It is true that such policy could be construed as Uber’s protective measures to
guarantee passengers taking a ride. However, the conditions imposed to the drivers are too harsh that
the policy resembles a controlling mechanism rather than a protective one. Uber drivers are only given
15 seconds to accept or decline a request. Furthermore, the drivers could not really reject an order
because there is a minimum ride number requirement that the driver must satisfy within a certain time
period to avoid the threat of deactivation. Rejecting several orders a day would directly result to
sanctions and disadvantages in the matching process. Uber drivers have no choice but to accept any
orders that pops up on their phone.

2) Surge Pricing Algorithm

The surge pricing algorithm is a significant proof that the drivers are exposed to information
asymmetry in their everyday experience. In certain time of the day, when demand levels increase, the
ride fares surges and the platform would notify the active drivers that there are certain temporal surge
zones where there is high demand of passengers awaiting available drivers. The platform recommends
the drivers to go to these locations and emphasizes that the driver would be able to generate extra
revenue. A heat map visualization would pop up indicating the surge rate.
Unfortunately, this information does not guarantee a 100% benefit to the driver. In fact, among Uber
drivers, there are voices that one must not go to surge zones because it is just a trap. According to drivers’
experience, the temporal surge pricing frequently ends while the driver is traveling to the location due
to sufficient supply of drivers. Drivers could never know how many drivers are heading to the surge
zone and could only make decisions based on the recommendation of the algorithm. Drives eventually
do not get any benefits but only incur more travel costs by following the recommendation.
Moreover, drivers reported that even though the application directs the driver to the surge price zone,
they would receive ride requests which are less profitable. For instance, a driver heading to a 3.5x
(multiplication of the normal rate) surge zone would end up receiving requests with a lower surge rate.
In short, using Akerlof’s lemon market as an analogy, the platform presents surge zones to the drivers
as if they were peaches, but the matching algorithm would actually give out lemons to the drivers. Again
Uber may escape from criticism and defends that the market manages itself by the surge pricing
algorithm. (Choudary, 2018)

3) Manipulation over Driver Behavior through “Soft Control”

Uber drivers must always turn on the software app during their working hours. Thus, the drivers are
frequently exposed to the messages from the app. The software has a game-like nature which influences
the drivers’ decisions. It would indicate rewards or milestones that the driver would achieve after
completing a certain task. The gamification of the app may nudge the Uber driver to work more hours.
Certain pop-up messages appear at specific moments. When a driver plans to log off and tries to close
the software app, messages such as “Are you sure you want to go offline? Demand is high in your area.”
(Prassl, 2018) The platform nudges the driver to stay online so that it could maintain a high level of
supply and meet the demands of the customers. However, during the extra hours, the driver might not
receive profitable requests or any requests. The structure of the ride-hailing market is designed to
constantly have more supply than demands. Consequently, within the platform, there would be always
some drivers spending time for unpaid work.

III. Implications
Despite the growing acceptance of sharing economy firms, the example of Uber shows that the digital
platform intermediaries take advantage of both requestors and workers. Both parties made inefficient
decisions because of adverse selection. However, the platform’s exclusive ownership of information
has more important caveats.

3.1 Reputational Feedback Mechanism as a Performance Indicator

This subtopic would be a direct rebuttal against the proponents of the reputational feedback
mechanism who suggested it as a solution to information asymmetry in section 1.2. Uber’s reputation
rating system is not a credible performance indicator and does not narrow down information disparities.
In fact the rating scores hurt both drivers and riders.
Reputational feedback mechanisms of the Uber platform disempowers the drivers. The rating scores
constantly remind and threaten the drivers that they could be excluded from the platform if they do not
reach a certain standard. (Choudary, 2018:22) The driver must obtain an overall rating higher than 4.6
stars out of five to avoid deactivation. The rating system makes the driver even more anxious because
it is their passengers who would give them the scores after a ride is over.
In traditional economies, performance evaluation is done by a middle manager who constantly
monitors the employee in the workplace. The middle managers in Uber are customers, passengers that
the driver has never met before. (Rosenblat and Stark, 2016) This is a big concern for two reasons. First,
not all passengers are aware of the policy that drivers must have an overall rating higher than 4.6. It is
highly possible that consumers perceive a four out of five as a high score while it is a failing score to
drivers. Nevertheless, educating consumers in the car is a virtually impossible task because Uber has a
strict policy forbidding drivers to ask or impose passengers for a certain score. Second, the customer
may always rate their Uber experience in a subjective manner without considering the conduct of the
driver. A consumer may give a low score just because of his or her feelings. As a result, the reputational
feedback mechanism imposes hidden cost on the driver. (Choudary, 2018:16) Drivers add efforts to
obtain a perfect score. This includes providing bottles of water, various treats, phone battery chargers
to the customers, and not to forget the additional emotional labor.
Moreover, rating systems do not benefit the consumers either. Reputational feedback mechanisms
are made with a purpose. The reputational ratings must assess the quality of a product and distinguish
high quality products from lower-quality products. However, the ratings in sharing economy platforms
does not even accomplish the simplest task of feedback. According to Tom Slee (as cited in Prassl,
2018:53), “there is no evidence that an Uber driver with a rating of 4.9 is better in any way than someone
with a rating of 4.6”. As mentioned above, some drivers may have lower scores just because most of
his or her customers were disgruntled during the ride. On the other hand, a certain Uber driver may have
a higher score than others, not because of a differentiated service, but thanks to multiple customers
giving out five stars unconsciously out of habit. The ratings do not give beneficial information to the
rider. High scores would not guarantee a pleasant ride.
Feedbacks work effectively when the ratings reach the market and functions as a valuable
information. Conversely, in Uber, the rating scores are only used internally as a minimum requirement
of the drivers. Thus, the rating scores with threshold levels would only facilitate the platform to exploit
its workers. More importantly, instead of being an effective performance indicator, the reputation
feedback mechanism in Uber instead became a source of power imbalance. Even though both drivers
and consumers evaluate each other at the end of the ride, consumers always have more power because
their rating may deactivate a driver. No guidelines or policies mention that a driver may block a
consumer from using the platform. Unfortunately, this is not the only source of power imbalance.

3.2 Power Imbalance and Employee Protection

The persistent information asymmetry in the ride-hailing industry centralizes the power to digital
platforms. The platform intentionally creates and increases the information asymmetry to deceive or
exploit market participants. (Choudary, 2018: 10) As we have seen from the examples of section 2, the
functions of the platforms are initially designed to give platforms greater power over riders and drivers.
While information strengthened the power of platforms to the maximum, it has placed the drivers to
the bottom of the hierarchy. Uber drivers suffer from the power imbalance from both consumers and
the platform. Consumers have a stronger bargaining power than the drivers because Uber subsidizes
consumer participation and transfers all possible risks and costs to the drivers. In other words, Uber
provides more incentives to consumers to keep using the platform at the expense of exploiting drivers.
Uber virtually forces its drivers to accept any ride request because consumers would start to leave if
they experience cancelled ride requests. This is why drivers only have few information and even a time
limit when accepting rides as seen in prior examples. What is worse is that riders may complain and
report to platforms if they believe that drivers do not take the route recommended by the algorithm.
Some ride-hailing platforms even allow customers not to pay for a completed ride without concrete
reasons and the platform itself may step aside to avoid being involved in a conflict. (Prassl, 2018:58)
Uber drivers are simply sandwiched between the customers and the platform.
Unfortunately, workers cannot do much to respond against the sanctions of the platform and the
reports of the consumers. It would be difficult for the drivers to overcome the power imbalance for two
reasons. For one, platforms would not stand for drivers because customers are more difficult to retain,
while workers are replaceable. According to Choudary (2018:14), in labor platforms, the more the work
is standardized and requires less skills, the work could be performed by a larger worker base because
the labor supply is less elastic to wage fluctuations. Another reason why Uber drivers would remain
exploited is because they are self-employed. They do not have any legal protection. Most ride-hailing
services work in the legal grey area and these firms intentionally create jargons and shape narratives to
avoid government regulations. (Prassl, 2018: 32-33) Such extent is visible in how the company treats
its employees. Uber classify workers as individual contractors and thus Uber drivers do not receive
regular pay. They do not have insurance and the pensions that all traditional employees had. As Scholz
(as cited in Rosenblat and Stark, 2016:3759) has already said, laborers in the gig economy are working
in worse conditions than even the most precarious working-class jobs had. While the gig economy and
its digital platforms designed an infrastructure for labor, it does not provide stability or benefits to the
workers. (Gregg, 2015 as cited in Rosenblat and Stark, 2016:3759)
The company’s preference towards cheaper labor and the operation of the business outside the
influence of legal protection has pushed the Uber drivers to extremities. Nevertheless, adverse selection
is preventable with appropriate remedies which satisfy the needs of all participants of the ecosystem.

IV. Solutions
In May 2019, Uber and Lyft drivers went on strike in New York and LA to fight against the low
wages and lack of job security. Unfortunately, collective action did not seem to be the best solution.
Strikers did not get full support from fellow drivers, meaning that the strike was not powerful enough
to disturb the match-making system of the algorithm. Collective action did not increase the laborer’s
negotiation power.
Information asymmetry can be reduced by controlling the information dominance of the sharing
economy firms. Both drivers and riders may expect improvements when the platform diffuses its
exclusive ownership of data.(Choudary, 2018:34) Thus, platforms should share their information with
third parties, make available more information to the workers.
 4.1 Portable Ratings and Dual Reputation
In the ride sharing industry, the algorithmic rating system itself is a source of power imbalance. The
rating systems of the platforms bind the worker to stay and continue working for the particular platform
(Prassl, 2018:111) Drivers are simply deprived of the opportunities to negotiate for better conditions or
to settle in other ride-hailing services. The overall scores and ratings that the worker has accumulated
in one platform would become worthless when moving to another platform.
Multiple literatures suggest that reputation ratings of the drivers must be transferable across
numerous platforms. (OECD, 2019:158, Prassl, 2018:108, Choudary, 2018: 40-44) With portable
ratings or reputation portability, drivers will have stronger bargaining power because the rating system
is no longer used internally in the platform but diffused through the market. Workers would no longer
be dependent on the original platform as they could negotiate with other ride-hailing platforms for better
working conditions. The independence and the choice to move to other firms could pressure the original
platform as ride-hailing platforms need a large pool of workers to meet the demand and losing a worker
to a competitor is not the best news.
Still, the platform which originally owned the rating information of the driver should not perceive
giving out ratings as losing a property. Portable ratings would also benefit the original platform because
rating information of the same driver would be gathered by different platforms and would be disclosed
to all ride-hailing companies. By providing an individual’s reputation to other platform firms, the
platform will also collect much information.
Furthermore, Choudary (2018:40) adds that portable ratings would enable dual reputation. As
reputation feedbacks are shared by multiple platforms, there may be two rating scores given to an
individual driver. One would be a platform-level reputation score which would measure the
performance of the driver within one platform. This information could be used by the platform to reward
the driver’s high performance. Another score would be a base-level reputation score which would
incorporate ratings from all platforms. The base-level ratings would become a reliable information to
customers as it would show whether the driver is credible or not. Platforms may also consider the base-
level score when making recruit decisions of new applicants.

4.2 Making the Platform More Transparent

The adverse selection in the ride-hailing platform can be attenuated by restructuring the platform
itself. Uber currently uses their algorithm to extract the maximum gain from its drivers by allocating
more risks and costs. However, the continuous exploitation of the workers would not benefit Uber in
the long run. Adding a few features in the platform would benefit all related parties of the ride-hailing
company.
The most straightforward method to deal with adverse selection in Uber would be making the
platform more transparent. Valuable information should be more available to the workers to make better
decisions. Providing information on competitors such as the number of drivers in the area or the number
of vehicles heading to a particular zone during surge pricing hours would decrease the possibility of
drivers wasting their time traveling with no profits by avoiding competition. Furthermore, informing
drivers the number of customers online in each area would be beneficial. Information on available
customers would allow workers to make their own choices when deciding their travel routes. Giving
space for autonomy would be ultimately advantageous to Uber as well. An increase in employee
autonomy may lead to stronger organizational commitment, weaker perception of work overload and
ultimately a lower intention of turnover. (Ahuja et al., 2007) Uber may provide such information by
either explicitly visualizing the online workers and riders on the software app or creating a
communication channel for drivers and passengers within the platform. An instant messaging tool
within the platform may help out drivers to diffuse valuable information quickly and consequently make
better decisions. Kingsley et al. (2015: 388-389) already proved that the online forums among gig-
workers of Amazon Mechanical Turk has decreased the search costs of the workers and allowed them
to choose more profitable tasks.

4.3 Employment Contracts and Fixed Remuneration

Another important initiative that Uber could implement is to negotiate fixed-term employment
contracts with their drivers and ultimately offer them a fixed wage. As mentioned above, Uber drivers
suffer because they have mostly irregular and low income, and their status as a self-employed laborer
does not give them any legal protection. A fixed remuneration would not only protect the workers from
exploitation but also benefit the ride-hailing ecosystem as a whole. In fact, this is a feasible measure
considering that Uber’s algorithm could track down all the activities of their drivers. Employees would
not dare to slack off while the platform is constantly monitoring them.
Fixed-term contracts with drivers benefit the customer because the fact that the driver is a regular
employee itself acts as a signal. Unlike the current rating system which could not inform whether the
driver is reliable or not, the fact that the driver is employed would mean that the driver is credible person
who is already verified by the platform firm. Furthermore, as Uber operates in a city-level, customers
would be able to form long-term relationships with the regular drivers and could request a specific
driver to pick them up.
With a fixed-wage compensation, it would be unnecessary for the firm to inform the drivers a specific
surge pricing zone. With the current surge pricing system, too many drivers end up roaming with no
passengers. Instead, the platform firm could change its algorithm to match the driver with the closest
passenger possible so that the firm can utilize its human resource to the fullest and minimizing time
searching for customers. Such policy would benefit the driver as well because it eliminates the search
cost of the drivers as well. Currently, drivers who are deprived of information are spending too much
time traveling to look for profitable potential customers. With a fixed remuneration, drivers would no
longer need to chase passengers in surge pricing zones. Obviously, more efficient matching algorithms
would allow customers to expect faster pick-ups.
Paying fixed remuneration to employees could be initially perceived as a loss to Uber. However, there
are already sharing economy firms who are benefiting by working with regular employees. According
to Berg, (2016:23) with fixed-term contracts, high supply of better trained workforce can be maintained
during peak times because employee turnover rates decline. As sharing economy emphasizes trust,
having regular employees with strong bonds with customers could contribute to higher customer
retention rates.

5. Conclusion
The advent of the internet has certainly contributed to the decrease in information asymmetry, and it
is true that the rise of sharing economy firms based on online platforms played an important role in
reducing the information gap between buyers and sellers. However, the internet gave an overwhelming
power to the platforms who accommodate both parties and also their information. With the surplus of
information, the platforms, as digital market intermediaries, started to exercise power over its users.
That is why a phishing equilibrium persists in the sharing economy.
By observing the examples of adverse selection in Uber’s ride-hailing services and how the platform
firm hurts its users, it was clarified that the ride-hailing business is not a level playing field. The
reputational feedback mechanism in the sharing economy platforms did not work as an efficient
performance indicator. It contrarily became a source of power imbalance and a tool of worker
exploitation. The consequences were grave, but they can be overcome with portable rating, increased
transparency in the platforms and a guaranteed fixed-term driver contracts.
Nevertheless, there are some questions left unanswered. Even though there are possible solutions, it
is unclear who will be actually paying to reduce the information asymmetry. It is difficult for the
regulators to rebalance the information gap by imposing certain policies, because sharing economy
firms have cunningly sidestepped regulations by shaping narratives and using ambiguous jargons,
which made it difficult to classify the firms in the legal area. (Prassl, 2018:18-22) The only players who
can change the situation at this point seems to be the platform firms themselves and their shareholders.
The problems of sharing economy also has ramifications in the Korean context because a ride-sharing
platform named Tada became a recent fad. Currently, more focus is on the firm’s conflict with the
traditional taxi business, but some issues of Uber are also observable in the Korean counterpart: drivers
do not get passenger information until they accept the ride. There is also power imbalance. Workers
take all the risks of the firm, customers threaten drivers by using reputation scores as a leverage and
request drivers to run irrelevant errands. Most importantly, the platform firm monitors the driver all the
time. Tada even measures drivers’ restroom break time. Uber and Tada are sharing economy firms.
Unfortunately, even though they are labeled as ‘sharing’, it is hard to figure out what they are actually
sharing.
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