Drivers of sharing economy [economics]
Several factors such as economic, social, technologic or environmental played an important role in the creation and expansion of the peer-to-peer economy. This section will be based on the economics drivers.
First of all it is probably mostly for economic reasons that the sharing economy looks like how it is today. As explained above, the period of financial crisis followed by recession weakened the capitalism way of thinking and consume. The turning point was probably the household crisis also called subprime crisis. It started with the American household market, there were two main groups : the investors (bank and investment funds) and the houseowners (who borrow money to buy houses). The investors had a lot of money and were looking for a safe and interesting investment, in the past they used to invest in the federal reserve (FED) but this organism changed the return rate on the investment and this was no longer attractive.
The investors used leverage effect. Basically it is borrowing money in order to earn more by investing and then repay the loan. For example, if I have 10€ and I sell for 11€, I earn 1€ but if I borrow thousands of money, this 1% in capital gain represents millions of dollars. This is how banks made money. So wall street borrowed huge amount of money in order to buy thousands of mortgages from the house owners and every month they received repayments from the homeowners and repay their loans earning a lot of money.
These mortgages were then separated in three parts the bankers will sell to different kind of investors according to their objectives : safe (AAA) for investors who want safe investments, ok (BBB) to other bankers and risky to hedge funds and risk takers. When the money arrived it was firstly uses to repay the safe part of the mortgages and then the others, if people do not pay, it is possible that the peoples who invested in the risky part do not receive money. The risk is always compensated by higher return rate. The first bankers makes millions of dollars and then repays his lawns and everyone is making money.
So the first banker try to find other mortgages but there is not any household (family) who wants one because everybody has got a house. When someone do not repay his mortgage, the banker take the house and sell it, which is pretty safe because the house always increasing in value at this moment. In order to find new peoples who wants a mortgage, bankers started to give more risky mortgage by do not asking to houseowners if they are able to repay, asking for down payment or proof of income. So instead of lending money to responsible person called “prime mortgages” as they did in the past, they lend to less responsible person called “subprime mortgages”. And the bankers kept rating these mortgages as a triple A in order to find investors and transmitting the risk to the next intermediary because as soon as it is sell, it is no longer his problem ! This is the turning point.
The system kept working and making money for everyone for a time. At a moment, the homeowners stopped paying because they were “risky and not responsible persons” so the bankers sold the house. It was still good at the beginning because the price of the properties were still high. However, more and more people were not able to pay and the bankers had to sell a lot of houses. There were so much houses on the market, and not enough demand so the prices stopped rising and dropped. The peoples who were still able to pay for their house also stopped paying because they though it was unfair to repay a mortgages of several hundred thousands of dollars when their houses worthed only fifty thousand.
The bankers had thousands of house without value and tried to sell them to other investors but nobody wanted them. Furthermore this investors borrowed huge amount of money in order to buy them thanks to the leverage effects explained before. Everyone in the investment chain had got a lot of these houses do not worthing anything. So everybody started to go bankrupt because every banks and investors used to work very closely to each other due to the money they borrowed between them, and the crisis arrived in Europe and the world very quickly (En savoir moins 2011).
It is important to understand how it happened in details in order to further understand all the consequences and how it led to the increase of the sharing economy.
The first thing is that in the US, the total number of unemployed Americans rose from 632,000 to 11.1 million representing almost 10% of unemployment. Around 2,6 million peoples lost their job only in the year 2008. In Europe, the consequences arrived later (2009) with also a high rate of unemployment: 9.5% in France and 8% in United Kingdom and Germany. It has been even more difficult for Spain, at the moment of the turning point they were in an housing expansion, investing a lot of money in training workers and resources. Everything had to stop due to the crisis and this drove them to one of the higher rate in Europe (up to 25%). Globally, every country in the world has been impacted by this recession from an unemployment point of view.
The second aspect impacted by the crisis and contributing to the recession is the reduction of the median household income. According to the INSEE, the economic growth just restart after almost a decade of low purchasing power. In fact, it decreases of 1% between 2008 and 2010, this phenomenon almost never happened in history. It has been followed by a decrease of the GDP of around 3% in almost every country in the world. The wages which are supposed to grow according to the growth of the inflation are at the same level since the beginning of the economic recession. So to conclude it led to a change in the consumption behaviour with less purchasing, a little bit more savings and also a lot more taxes in order to relaunch the growth thanks to an austerity politics. It is a vicious circle and it is difficult to stop it.
Finally, millions of peoples lost their houses, mortgages providers also lost their savings due to the risks banks took just for having higher returns. The consequences were disastrous for the peoples who also lost their jobs and this led to a loss of trust and confidence in political leaders and institutions. That is why peoples were looking for another alternatives reducing the intermediaries and complexity of the networks by coming back to a more “traditional” way of doing business.
For all of these reasons, most of the sharing and rental service has been create between 2008 and 2010 mostly because it was a solution at the problems caused by the recession. It brings advantages for users and also for businesses. This is important that it benefits to both in order to be accepted.
First of all, it brings an extra revenue to the users who can rent underused assets to own to mesh companies, some research on the Airbnb users point out that someone renting his house can make around 7000 dollars per year. This study also highlight that 70% of the Airbnb users are agree that it is a good way to make extra money. Nowadays it get more and more difficult to have a job and the skills required are higher and higher. There is not any skills required to enter in the sharing economy and start making money. By using these kind of peer to peer platform, individuals can always find extra revenues whatever happened on the labour market. This safety played an important role in the progress of the sharing economy.
On the other hand, businesses can use a full mesh approach. Companies can have a better return on their invested assets by giving an access to them with a high frequency and this will increase their profit. Business can also take profit of an own to mesh model by operating as an intermediary and taking one part of the transaction amount, this allow to operate quickly and at a bigger scale without a huge starting investment because as a reminder, companies, with this model do not own the assets (Botsman and Rogers 2011).
Finally, according to Gansky, the mesh models businesses use to be very close to their customers by maintaining a strong and a confident relationship with them. This increase the awareness and responsiveness of the businesses in order to react and find new consumer trends and stay in line with the demand. From the customer point of view, this relationship with these businesses is also beneficial. In fact, the company need to really take care of their customers by providing them good services .
To conclude, the sharing economy has the advantage to be flexible, convenient with ow barriers to entry and, for the moment, minimal regulations.
See the second article for the social, technological and environmental drivers.
