Payment protection insurance is increasingly widespread across the economy to protect people from unforeseen events, such as losing a job, becoming ill, or some other circumstances that prevent them from earning the income required to service a financial commitment.
A new paper from Temple University explores its growing usage in the platform economy on both the buyers’ and sellers’ side. The paper highlights how the revenue from sharing transportation and accommodation alone is projected to reach around $335 billion by 2025.
They highlight, however, the significant transaction uncertainty consumers face on sharing platforms, with the reputations and brands of many sellers on the platform unknown, despite the review systems in place. As a result, many sharing economy players have started to adopt platform-level buyer protection insurance (PPI), which provides buyers with insurance protection against any harm caused by sellers on the platform.
“We find that PPI significantly increases buyer spending and seller revenues, affirming the benefits of this service in the sharing economy,” the researchers explain. “We also uncover multifaceted buyer-side and seller-side responses that enable such benefits.”
Safety net
The authors argue that PPI increases buyer spending by providing the security to encourage them to order more and a wider range of products and services. It also boosts sellers by supporting customer retention and acquisition.
The research suggests that the presence of PPI does little to increase either adverse selection among buyers, such as buying more from low-quality sellers, or opportunistic behavior from sellers, such as increasing prices.
These benefits are even greater for buyers who have had worse experiences in the past, or indeed sellers with less time on the platform to build up a reputation. The PPI acts to reduce transaction uncertainty and risk.
“Our findings suggest that PPI may nurture trust among consumers and boost sales transactions for sellers, which will improve the business performance of sharing platforms,” the researchers explain. “Results on whether and how PPI affects the efficacy of sharing platforms also enable platform managers to better communicate and build a trusted relationship with external stakeholders to gain more institutional legitimacy from public-policymakers, raise funding from venture capital and stock markets, and boost platform reputation in news channel and social media.”
The researchers believe that their models provide platform managers with the quantifiable benefits that can help them justify making the investment in PPI, both in terms of putting it in place and also in marketing its availability to buyers and sellers.
“Our DID modelling with two-way fixed effects based on a natural experiment provides managers with a viable solution or toolbox to scientifically gauge the causal impact of insurance and other platform governance policies in the sharing economy,” they conclude.
