M-RCBG Associate Working Paper No. 97
Trust mechanisms and online platforms: A regulatory response
Mitchell Watt and Hubert Wu
Online platforms are rapidly transforming the global economy. These businesses, including six of the world’s ten largest companies, have evolved new solutions to overcome trust problems and asymmetries of information inherent in exchange on the Internet. These features are known as trust mechanisms.
Trust mechanisms are challenging old approaches to regulation, with new technology rendering many existing regulations unnecessary or unsuitable. Some online platforms have pursued new forms of self-regulation; others have taken an adversarial stance towards government intervention in its entirety. Meanwhile, standard approaches of regulators towards trust mechanisms are yet to be developed.
This report examines some of the benefits and costs of trust mechanisms in the digital economy and develops recommendations for regulators to adapt their approach in response to these new business models.
First, we map the space of trust mechanisms operating today, and propose a classification schema focused on the participants, informational content and function of a trust mechanism. While online platforms differ in terms of the transparency of their trust mechanisms, we show that design choices depend on the nature of the trust problem faced in the industry. We also demonstrate that firm-level differences in trust mechanisms may impact the competitive dynamics of an industry.
Second, we present evidence on three categories of benefits of trust mechanisms: a reduction in the regulatory burden for businesses, the expansion of markets enabled by trust mechanisms and an enhanced ability of governments to target spending using information gathered by online platforms. The impact of trust mechanisms on occupational licensing alone is estimated to be a decreased regulatory burden of more than $790 million.
Third, we analyze the potential harms to the market that may be associated with trust mechanisms, including new forms of discrimination; the possibility of new market failures and imperfections; and the possibility of strategic manipulation with competitive implications for markets.
Our report concludes with several recommendations for business regulators based on our analysis and findings.