Cancellation Policy as a Signal of Trust and Quality in the Sharing Economy: The Case of Airbnb

Abstract

We study the effect of cancellation policy settings on listing demand in the context of Airbnb, a popular home-sharing platform. We employ a difference in differences strategy to show that, contrary to previous findings in the traditional accommodation industry, listings with a strict cancellation policy have, on average, four percentage points higher demand than listings with a more lenient policy. We complement these findings with a survey of real Airbnb users aimed at understanding the mechanisms behind our results. We find that Airbnb guests perceive listings with a strict cancellation policy to be of higher quality and their host to be more trustworthy. These results suggest that the cancellation policy of a listing can act as a signal of quality and, in turn, can increase the listing demand. Overall, our findings suggest that sharing economy platforms like Airbnb do not only offer a new business model and value proposition, but they also have the potential to affect consumer behavior and their decision-making process in ways that are different from more traditional settings.