Thursday, October 08, 2015

D.C. Council Shouldn't Regulate Airbnb

In late September 2015, two proposals, which would to add excessive regulations onto roomsharing applications such as Airbnb, were proposed to the D.C. Council. Airbnb has been under scrutiny in the past, but it is often because states and municipalities, sometimes wrongly, claim they are not receiving tax revenue from Airbnb transactions. However, in the District, Airbnb has already agreed to collect and remit the full tourist tax levied on short-term rentals.
It’s pretty clear that these two proposals have been initiated by the hotel industry and its employees in an effort to restrict competition in the marketplace. One proposal has been supported by Unite-Here Local 25, a union that represents 6,500 hotel employees in the D.C. area, and the other proposal was drafted by a coalition of large hotels located in the D.C. area.
The D.C. government requires individuals who share spaces for less than 30 days to obtain a business license, but both of the draft ordinances would limit what the license holder can do with his or her property. For example, the proposal backed by Unite-Here only allows a host to share one space at a time and requires that the owner/tenant be present while the rental occurs. The D.C. hotel industry’s draft legislation allows a host to share up to five units at a time but has strict requirements on the number of guests and the length of their stay. The Unite-Here proposal allows for food and alcohol sales if the host is properly licensed, but the hotel industry’s proposal prohibits such sales.
Public safety, consumer protection, and food and health standards are often appropriate, even necessary, regulations for state and local governments. But both of these proposals go beyond simple standards and instead create costs that ultimately will restrict competition from roomsharing applications and benefit the hotel industry and its workers.
In a Perspectives from FSF Scholars entitled “Eight Takeaway from the FTC’s Sharing Economy Workshop,” I said that reputational feedback mechanisms, which are inherent in roomsharing applications, enable trust between trading partners and filter out harmful economic actors:
On Airbnb, hosts will use reputational feedback to filter through strangers in order to find guests responsible enough to share a living space with. Yet guests are just as likely to rely on this reputational feedback mechanism to avoid unsafe or unhealthy living spaces. The transparency provided by competitors’ ratings and reviews allows hosts and guests to easily compare the trustworthiness of respective counterparts. Additionally, even if a host or guest is a first time user, the accountability provided by reputational feedback mechanisms incentivizes the user to be as responsible as possible.
Reputational feedback mechanisms produce a self-regulating marketplace, so additional government regulations would only levy unnecessary costs on consumers. In comments submitted to the FTC in May 2015, FSF scholars discussed the importance of policymakers to focus on consumer welfare, rather than the welfare of specific competitors:
It is also critical that federal, state, and local governing authorities alike remain closely attuned to concerns over consumer welfare, rather than competitor welfare. Special or partial laws and regulations designed to protect incumbent competitors from new sources of competition, even if undertaken under the pretense of protecting competition, are unjustifiable and will harm consumers. Hopefully, market incumbents opposed to the proliferation of innovative and disruptive new Internet services and applications will less frequently succeed in manipulating laws and regulations to stifle sharing economy services merely because they possibly may adversely impact preexisting businesses.
In the same Perspectives from FSF Scholars, I discussed why “deregulating down” is a more efficient way for governments to establish the proverbial “level playing field” between incumbent actors and new entrants:
Indeed, regulations and taxes should not be levied on businesses differentially without legitimate reasons. As I wrote about in a blog earlier in June 2015, David Hantman, Head of Global Public Policy for Airbnb, and the FSF scholars agree on that principle. However, subjecting new entities, like Airbnb, to old regulations lessens the competitiveness of the market because smaller firms and/or emerging firms are often not well-established enough or profitable enough to cover the costs of such unnecessary burdensome regulations.
To the extent there are concerns about the impact of differential regulations not based on legitimate reasons, equity should be accomplished by deregulating down, not by regulating up. Deregulating down gives consumers the freedom to choose which businesses provide the most value. As FTC Commissioner Maureen Ohlhausen stated during the workshop’s opening keynote address, “it is not for us in government to pick the winners and losers in the marketplace.”
The restrictions in these proposals make no sense when the impact they would have on the local community is analyzed. They create costs that impede the ability of local residents to act as entrepreneurs and provide more choices to lodging consumers. For example, the hotel industry’s draft legislation says “a property may not be rented out on a short-term basis if the owner has received affordable housing funds or if the property is rent controlled.” This requirement does not benefit the public or consumers; it simply eliminates less costly lodging options, which only favors local hotels. If anything, roomsharing should be embraced in these circumstances in order to reduce or offset the fluctuation in housing investment that rent controls and subsidies can exacerbate. Additionally, roomsharing allows poor residents to earn extra income.
It is important that the D.C. Council not adopt either of the proposals. These proposals create unnecessary costs for local residents and entrepreneurs. If adopted, they will reduce lodging competition, lower income for residents, and raise prices for consumers.