Regulating the ride-sourcing platform under asymmetric information: A mechanism design approach

Abstract

To address the regulatory challenges arising from cost information asymmetry between governments and platforms, this study designs a mechanism based on incentive-compatible (IC) regulation, which could nullify the platform's incentive to misrepresent private cost information (such as the data analysis costs required to improve service quality). We develop two microeconomic models to maximize social welfare under symmetric and asymmetric cost information, considering the negative externality cost of the ride-sourcing services, such as road resources occupancy and environmental pollution. By comparing the analytical results under these two models, we find that: (i) in a state of equilibrium, the optimal regulatory mechanism with symmetric cost information can achieve Pareto optimality and effective resource allocation; (ii) cost information asymmetry leads to stricter quantitative restrictions and increased passenger waiting time, resulting in a reduction in actual demand despite lower price under asymmetric information. (iii) IC regulatory policy can incentivize platforms to reduce cost, thereby obtaining greater “informational rent”. Furthermore, we discuss two extended policies: “One-size-fits-all” policy based on the expectation of cost information and the general policy where the government does not consider the possibility of platform misreporting to examine the efficiency of IC regulatory policy. We find that both the “One-size-fits-all” policy and the general policy lead to a greater loss of social welfare. Finally, we design a harsher IC regulatory policy considering price regulation, and find that price regulation could bring more social welfare improvement than quantity regulation.