New Paper: New Technologies are Upending the Typical Role of Regulation

On November 19, 2015, Will Rinehart, Director of Technology and Innovation Policy at American Action Forum, released a paper entitled "The Modern Online Gig Economy, Consumer Benefit, and the Importance of Regulatory Humility.” In the paper, Mr. Rinehart discusses the many consumer benefits of sharing economy platforms. He also says that reputational feedback mechanisms create transparency and enable trust between consumers, upending the typical role of regulation. This is an important paper for understanding why competition and self-regulating markets can often create more efficient outcomes for consumers than government regulation.

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. 

New Report: UberX Helps Low-Income New Yorkers

I’ve written multiple blogs explaining how the sharing economy provides access to services and income that many people would not have otherwise. This access increases the standard of living of all sharing economy users, but it has an even greater beneficial impact on low-income users compared to high-income users. (See here and here.) Free State Foundation scholars also discussed this important economic effect in our comments to the Federal Trade Commission back in May 2015.

Jared Meyer, Fellow at the Manhattan Institute, has authored a new report entitled “Uber-Positive: The Ride-Share Firm Expands Transportation Options in Low-Income New York,” presenting evidence that Uber’s service greatly benefits low-income New Yorkers. While Mr. Meyer’s report does not analyze which income group benefit more from Uber’s service, it certainly disputes the stereotype that Uber passengers are generally wealthy.

In a follow-up blog, Mr. Meyer discusses the popularity of UberX (Uber’s lowest-cost, non-luxury, and most frequently used service) in poor neighborhoods:

The largest increase in UberX rides from January 2014 to December 2014 was seen in zip codes with below-median incomes. Seven of the 11 zip codes outside core Manhattan (below Central Park North) that saw their numbers of rides grow by over 1,000% have below-median incomes.

Over the course of 2014, the historically low-income neighborhoods of Jackson Heights, Astoria, Harlem and Washington Heights all saw increases in UberX trips of over 1,200% — that’s more than 12 fold.

Mr. Meyer also disputes the stereotype that Uber is not popular in predominately black communities: “In the 29 zip codes outside of core Manhattan with one or more UberX pick-up per household during 2014, black households made up an average of 29% of households, while the average for all zip codes outside of core Manhattan was 27%.”

Mr. Meyer argues that NYC Mayor Bill de Blasio’s theory that Uber trips are creating congestion is exaggerated because in 2014 “there were around 175 million annual yellow taxi trips, and just under 9.5 million UberX trips.”

I think it’s fair to say that Uber and other ridesharing companies are having a positive impact in New York for people of all backgrounds, ethnicities, and income levels. Mayor de Blasio should take note of this report and encourage Uber’s growth, not attempt to restrict it as he has tried in the past. (See this blog for more.)

Bill Maher Does Not Understand the Sharing Economy

In a segment during his most recent episode of HBO’s “Real Time with Bill Maher,” Bill Maher stated that the sharing economy is the result of Americans adapting to income inequality in a “greed is good world.” He also called the sharing economy the “desperate economy,” because as a millionaire himself, Bill Maher apparently thinks it is sad that people are so desperate for money that they would share their home or car. He finished the segment by saying: “The one thing we’re not sharing are the profits. Somehow they forgot to make an app for that.”

It is clear from this segment that Bill Maher does not understand how the sharing economy operates. He even called it a “barter economy” at one point.

The sharing economy incentivizes entrepreneurial activity. While “profit sharing” may not be the apt term to describe how the sharing economy makes people better off, workers in the sharing economy are contractors; therefore, they create their own work, display their own skills, and are compensated directly for their own services. Each worker is essentially operating his or her own business. The sharing economy empowers workers and consumers through the use of reputational feedback mechanisms and peer-to-peer transactions, so the profits are being spread among the millions of users every single day. (See this recent Perspectives from FSF Scholars for more on the importance of reputational feedback mechanisms.)

Bill Maher claimed that the sharing economy is increasing income inequality and that workers have no choice but to engage because of a stagnant labor market in the U.S. If this is true, it makes the sharing economy a solution for workers, not the problem Maher claimed it is. He even made the following misguided statement about Airbnb: “Do you really think anyone wants to have total strangers living in their apartment for a week?” Well, clearly some people do want this, considering that Airbnb has had over 1.5 million listings in 190 countries around the world. Maher never explained how he thinks the sharing economy is harming the poor or exacerbating income inequality. But I can tell you he is wrong.

In May 2015 Free State Foundation scholars submitted comments to the Federal Trade Commission regarding the sharing economy. In the comments, we discussed the results of a March 2015 paper entitled “Peer to Peer Rental Markets in the Sharing Economy,” which empirically found that, for a couple reasons, sharing economy markets have an even greater beneficial impact on low-income persons than high-income persons.

As we explain in our FTC comments, the sharing economy raises the standard of living for poor consumers by creating access to goods and services that they would not have otherwise:

Due to the accountability and transparency that many sharing applications provide about their users, the emergence of trust between individuals to share their goods and services has shifted consumer preferences from owning to renting. People who could not afford to own a house, car, or even a power saw can now more easily rent them from others and ultimately enjoy a higher standard of living than they would have otherwise. Additionally, people who would have owned a car or power saw in the past might now rent them instead, saving a significant portion of their income.

Of course, consumers with high-incomes gain from the sharing economy as well. But the savings accumulated from a shift in owning to renting is more valuable to consumers with lower incomes. In economic terms, this is the law of diminishing marginal returns. All else being equal, each dollar earned is valued less than the previous one.

We also explained how the sharing economy creates entrepreneurial opportunities for poor people that would not exist otherwise:

Similarly, low-income consumers who already own goods that can be rented out stand to gain more from these transactions than high-income consumers. The extra income from sharing a car with someone is much more valuable to a poor college student than it is to a wealthy professional. Airbnb, for example, makes traveling less expensive, not only because it provides competition – and often lower prices – to traditional hotels, but also because travelers can share their living space while away. In other words, as a result of the sharing economy, the same traveler on the same trip may realize economic benefits in his or her capacity as both a lessor and lessee.

If Bill Maher were to stop criticizing successful businesses, maybe he would be able to appreciate the real economic benefits that the sharing economy enables, especially the benefits it brings to low-income individuals. But the fact that Bill Maher thinks the sharing economy exacerbates income inequality makes it clear that he has no idea how the sharing economy actually operates – through reputational feedback mechanisms which enable bisymmetrical trust and enhance welfare between consumers and workers.

Uber's New Feature Likely Caused de Blasio to Drop Bill

On Wednesday, July 22, New York City Mayor Bill de Blasio dropped his proposed legislation which would have slowed the growth of Uber in NYC by limiting the number of drivers it could add over the next year, according to a New York Times article. This is very good news for the NYC economy. Prior to the bill’s cancellation, according to a TechCrunch article, David Plouffe, Chief Advisor for Uber, said the regulation would “cost 10,000 jobs, hurt underserved areas, and make wait times for Uber cars skyrocket.”

Mayor de Blasio likely dropped the proposed legislation due to an outcry from consumers and drivers, which Uber helped enable through use of its application. Even a couple famous celebrities jumped in on the action.

Proposed bill will result in longer wait times, higher prices, and less reliable service for riders. #deBlasioUber pic.twitter.com/5R2ToNhEuY

— ashton kutcher (@aplusk) July 21, 2015

.@BilldeBlasio Why do you want to return to days when only those in Midtown & Lower Manhattan could get a ride? #UberMovesNYC

— Kate Upton (@KateUpton) July 22, 2015

In response to the bill, Uber added a so-called “de Blasio’s Uber” feature to its application for over 2 million NYC users. When NYC users clicked on this feature it showed either no available drivers or a wait time of 25 minutes, representing how Mayor de Blasio’s proposed legislation would have severely impacted the market. (Uber rarely has a wait time over 5 minutes in populated cities.)

Then, instead of contacting a driver, the feature prompted an email to Mayor de Blasio and NYC’s City Council Members with an automatic statement opposing the bill. 

Free State Foundation Scholars submitted comments to the FTC prior to its June 9 workshop, warning against burdensome “sharing economy” regulations that did not serve legitimate health and safety objectives. FSF Scholars stressed that policymakers should focus on how the sharing economy has brought consumers efficiency, affordability, and convenience. So, it is good that consumers and drivers stood up against Mayor de Blasio’s protectionist legislation that would have inhibited Uber’s growth.

This example may dampen efforts by government officials in this country and around the world to restrict innovative new sharing economy businesses that benefit consumers by creating more competition and choice.

Senator Cruz Asks FTC To Not Regulate the Sharing Economy

On Friday, July 17^th, Senator Ted Cruz sent a letter to FTC Chairwoman Edith Ramirez asking the Commission to reject requests from Members of Congress and incumbent businesses to apply regulations to the sharing economy. Senator Cruz stated that burdensome regulations would restrict competition in the sharing economy which “offers consumers enormous freedom and economic potential.” He also declared the following: “In a number of instances, and in a number of states, pre-existing regulatory regimes have been extended to new entrants in ways that may ultimately deprive consumers of significant cost savings and convenience that would otherwise accompany an expanded sharing economy.”

Free State Foundation Scholars submitted comments to the FTC before its June 9^th workshop regarding the sharing economy. (See this Perspectives from FSF Scholars on the 8 takeaways from the workshop.) We commend Senator Cruz for encouraging the FTC to promote permissionless innovation, marketplace freedom, and consumer choice within the sharing economy.

Airbnb's David Hantman Discusses Competition in the Lodging Market

The Federal Trade Commission (FTC) hosted a stimulating workshop on the “sharing economy” on Tuesday, June 9, 2015. The workshop offered a variety of perspectives from regulators, academics, and industry executives on the sharing economy’s emerging and innovative business models.

I found the third panel particularly interesting because its participants included industry executives associated with emerging sharing applications and incumbent business models. Specifically, the back-and-forth conversation between David Hantman, Head of Global Public Policy for Airbnb, and Vanessa Sinders, Senior Vice President and Head of Government Affairs for the American Hotel and Lodging Association, was very informative.

Ms. Sinders argued that Airbnb should abide by the same set of rules and regulations that hotels abide by. She said that without these regulations there is a possibility that Airbnb consumers could experience unsafe and/or unhealthy conditions. She claimed that hotel consumers have a consistent expectation about what they will experience when they walk into their rooms while Airbnb users do not. But Mr. Hantman stressed that the reputation feedback mechanism within Airbnb’s application has created transparency and accountability for every transaction, which enables trust between the hosts and the guests. He also mentioned that Airbnb has a $1 million insurance policy that protects users in case any unforeseeable incidents arise.

Among her concerns, Ms. Sinders stated that many hosts are using Airbnb as a business enterprise and renting out entire apartment buildings. She said: “If it looks like a hotel and acts like a hotel, it should be treated like a hotel.” But Mr. Hantman agreed with her that the hosts who use the Airbnb platform to essentially run a hotel operation should be required to get business licenses just like hotels. He stated, however, that the overwhelming majority of Airbnb hosts only share their homes a couple times a year, and many do it in order to make ends meet. Mr. Hantman said these are the people that the Airbnb online platform targets as hosts.

Interestingly, Mr. Hantman declared that, in his view, he and Ms. Sinders are actually in agreement on most things, even though Ms. Sinders refuses to acknowledge it. They both do not want consumers to experience unsafe or unhealthy conditions, and they both think hosts who rent out their spaces in the same fashion as a traditional hotel should obtain a license.

In response to Ms. Sinders’ claim that Airbnb listings are “illegal hotels,” Mr. Hantman reported that Airbnb has tried on many occasions to pay lodging taxes in New York (where it has received a substantial pushback from Attorney General Eric Schneiderman), but, curiously perhaps, the lobbying efforts of the American Hotel and Lodging Association, thus far, have helped prevent Airbnb from doing so.

In an FSF blog from October 2014, Randolph May and I analyzed the New York Attorney General Eric Schneiderman’s report in which he characterized Airbnb listings as “illegal hotels.” We argued that, aside from disputable legal characterizations, all the data in the report shows that these so-called “illegal hotels” benefit consumers and New York’s economy. If they were not meeting the demands of consumers, then Airbnb’s economic activity in New York would not be increasing annually.

As Mr. Hantman stated at the FTC’s workshop, if the lack of tax payments was the only reason for questions about the legality of Airbnb listings in many cities, then these concerns would have been worked out because Airbnb is willing to comply. Instead, lobbying pressure from the hotel industry to local governments (presumably based on fear of competition) has resulted in legal or regulatory threats to Airbnb listings in many cities around the world.

As Randolph May and I stated in our July 2014 Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”

If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.

In Mr. Hantman’s concluding remarks, he stressed that he is optimistic that mutually satisfactory agreements will be reached in the cities where Airbnb’s compliance with legal requirements is called into question so that it can continue to serve consumers. He said Airbnb wants to work with local governments around the world to provide them with anonymized data so they can monitor the activity that is occurring in their jurisdictions, while also protecting the privacy of Airbnb users.

This was just one of the many informative topics discussed at the FTC’s workshop on the sharing economy. I anticipate posting a blog in coming days about the key takeaways from the discussions at the workshop.

FSF Scholars Submit Comments Regarding FTC’s Sharing Economy Workshop

On May 26, 2015, Free State Foundation (FSF) Scholars submitted comments to the Federal Trade Commission (FTC) for its upcoming June 9^th workshop regarding competition, consumer protection, and economic issues raised by the “sharing economy.” FSF Scholars make several key points about the sharing economy’s positive impact and what the government’s ultimate role should be.

First, the sharing economy’s positive impact is one of fostering innovation, creating value, and providing cost savings options for consumers. From a recent PWC survey, 86 percent of U.S. adults who are familiar with the sharing economy agree that it makes life more affordable and 83 percent agree that it makes life more convenient and efficient. Further, the sharing economy is particularly beneficial for low-income consumers. As stated in a FSF blog, the sharing economy has shifted consumer preferences from owning to renting, and the additional benefits and savings low-income consumers accumulate from this shift has a substantial impact on their standard of living.

Second, as discussed in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” the emergence and success of the sharing economy is unequivocally due to marketplace freedom and “permissionless innovation.” The lack of barriers to market entry (such as regulatory costs, licenses, and start-up fees) has enabled companies like Airbnb and Uber to quickly emerge and provide their services in many cities and towns throughout the world.

Third, fear of competition is not a valid basis for regulation. Traditional legacy businesses (such as hotel companies or taxicab commissions), which compete with sharing economy applications, argue that such emerging companies should be subjected to the same level of regulations and taxes. FSF Scholars argue that the best way to “level the playing field” is to deregulate down by eliminating old and unnecessary regulations, not regulate up. Unnecessary regulations can often be captured by well-established companies or applied in a discriminatory way by policymakers, leading to government picking winners and losers instead of consumers.

Lastly, sharing economy markets have efficient self-regulating mechanisms. Many sharing applications have online rating systems and feedback information in order to keep both buyers and sellers accountable and transparent. Other things like insurance policies and immediate payment systems help mitigate risk. FSF Scholars believe that by allowing for free-market innovation to flourish, competition - which we believe is the best form of regulation - will thrive. In competitive markets, sharing economy applications and its users have the incentive to provide friendly, safe, and healthy environments, because consumers will choose better alternatives if they do not.

FSF Scholars are very optimistic about the future of the sharing economy and all that it could possibly accomplish. Much of it is unknown and yet to be discovered, so we hope that policymakers at the FTC and at state and local levels presumably favor marketplace freedom over regulation.

Maryland's Ridesharing Legislation Is Better Than Prohibition

On April 14^th, the Maryland Senate followed the House of Delegates in passing legislation, which would legalize commercial ridesharing applications like Uber and Lyft, making Maryland the tenth state to pass such legislation. Now, the legislation waits for Governor Larry Hogan’s signature to become a law.

I commend Maryland legislators for understanding that the emergence of the new “sharing economy” is in the interests of consumers and the economy as a whole. I commend them for realizing that new innovative technologies are emerging to compete with traditional business models. I also commend Maryland legislators for not giving in to the interests of taxicab commissions by issuing an outright prohibition on ridesharing services. And I appreciate that the legislation bans Maryland municipalities from levying taxes or additional regulations on ridesharing companies or any participants in ridesharing markets. (Although, it has been reported that municipalities could add a $0.25 surcharge fee on all rides. See here and here.)

Having said all this, I would not call this legislation a free-market approach to the sharing economy. The provisions require “transportation network companies” – as the legislation defines ridesharing companies - to collect, file, and register information, creating a barrier for new startups to emerge in the ridesharing market.

For example, a transportation network company must register with the Public Service Commission, create an application process for individuals to apply for registration as a transportation network operator (driver), maintain a current registry of drivers and their personal information, and submit proof to the Commission that the company is registered with the State of Maryland – just to name a few of the requirements.

Uber and Lyft already keep driver information on file in order to provide transparency and accountability to their consumers. So this is not a costly requirement, right? Wrong. Uber and Lyft are already well-established and likely can afford to cover these costs. But a new ridesharing start-up, on the other hand, may not have the capital to provide this type of immediate transparency, thus they will not be able to operate in Maryland.

I do not know how long the registration and approval process will take for a “transportation network company” to become certified with the Commission. But if it has taken several years for Maryland legislators to recognize the benefits of ridesharing because the interests of taxicab commissions have hindered the process, it concerns me that new ridesharing start-ups will be disadvantaged at the hands of well-established companies like Uber and Lyft. In other words, these rules could incentivize successful ridesharing companies like Uber and Lyft to lobby Maryland’s Public Service Commission to reject the entry of potential competitors.

Additionally, the reason that ridesharing companies must maintain personal information about their drivers for the Public Service Commission is because the legislation also has a long list of regulatory standards for drivers regarding age, criminal background, and vehicle compliance. The standards that the State would require might be in the interest of public safety, and they are likely similar to the standards that Uber and Lyft administrators already conduct when hiring drivers. But it seems unnecessary and costly for both the respective ridesharing company and the Commission to perform a background investigation on each driver. Instead, a case-by-case investigation of instances of consumer harm would be warranted to insure that ridesharing companies have followed the State’s standards.

Interestingly, taxicabs are regulated at the county-level in Maryland, therefore ridesharing drivers might actually be subjected to regulations that taxicabs drivers are not. Yet, even if drivers of ridesharing companies and taxicab drivers were subjected to the same regulations - which would be a fair way to “level the playing field,” it does not necessarily mean the public is any safer. Competition, not regulation, generally provides the most benefits to consumers, whether those benefits come in the form of lower prices, more convenience, public safety or healthy environments. As Randolph May and I stated in our Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”

If purveyors of sharing applications engage in harmful, unhealthy, or unsafe activities, competition is probably the most important regulatory mechanism to address any real problems. In competitive markets, poor consumer satisfaction generally means that a company will lose market share, or even fall out of the market. If a company is not operating safely or if it is putting its users in unhealthy conditions, a competitive market allows for unsatisfied consumers to choose alternatives.

The legislation does lift some of the burdensome licensing regulations for taxicabs, but other regulations that remain appear unnecessary. Rather, many of these regulations appear to have been adopted to “level the playing field” between ridesharing companies and taxicab companies. In our paper, Randolph May and I stated:

If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.

It is fair to apply the same level of regulation to both taxicabs and ridesharing companies, but the best way to “level the playing field” is to deregulate down and open the market to contestability and competition – not regulate up as this legislation would do.

Despite all of this, a regulated ridesharing market that makes room for new entrants is still better than one based on prohibitions that render new entrants unlawful.

Study Finds Low-Income Persons Gain Most from 'Sharing Economy' Markets

I have written several follow-up blogs to a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” which was published last year. These pieces have referred to the welfare gains consumers have experienced in the new “sharing economy.” Many new companies employing Internet-based applications, such as Airbnb and Uber, have emerged to provide competition to traditional business models and subsequently pushed down prices in their respective markets.

In the Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future,” Randolph May and I stated the following:

These new online applications facilitate the exchange of goods and services in a way which easily enables a range of peer-to-peer connections and which reduces transaction costs. Individuals have always been able to sell or borrow goods and services through yard sales and community markets, but the Internet has changed the process with a faster, easy-to-use information exchange. For over a decade now, companies like E-bay and Craigslist have used the Internet to lower the transaction costs of modern commerce. But more recently, an influx of new companies and Internet-based applications has emerged enabling individuals to more easily “share” their underutilized things, including, for example, their homes, apartments, and cars.

In a newly-published March 2015 scholarly paper entitled “Peer-to-Peer Rental Markets in the Sharing Economy,” New York University professors Samuel Fraiberger and Arun Sundararajan empirically tested how rental markets within the “sharing economy” are impacting consumers. Professors Fraiberger and Sundararajan found, with statistical significance, that the benefits of “sharing economy” markets have a greater impact on low-income persons than high-income persons.

The new study states:

We highlight this finding because it speaks to what may eventually be the true promise of the sharing economy, as a force that democratizes access to a higher standard of living. Ownership is a more significant barrier to consumption when your income or wealth is lower, and peer-to-peer rental marketplaces can facilitate inclusive and higher quality consumption, empowering ownership enabled by revenues generated from marketplace supply, and facilitating a more even distribution of consumer value.

The explanation of the results is quite simple. Due to the accountability and transparency that many sharing applications provide about their users, the emergence of trust between individuals to share their goods and services has shifted consumer preferences from owning to renting. People who could not afford to own a house, car, or even a power saw can now more easily rent them from others and ultimately enjoy a higher standard of living than they would have otherwise. Additionally, people who would have owned a car or power saw in the past might now rent them instead, saving a significant portion of their income.

Of course, high-income people gain from the sharing economy as well. But the savings accumulated from a shift in owning to renting is more valuable to people with low incomes than to people with high incomes. In economic terms, this is the law of diminishing marginal returns. All else equal, each dollar earned is valued less than the previous one.

Similarly, low-income people, who already own goods that can be rented out, stand to gain more from these transactions than high-income people. The extra income from sharing a car with someone is much more valuable to a poor college student than it is to a wealthy professional. As I have written before, Airbnb, for example, makes traveling less expensive, not only because it provides competition – and often lower prices – to traditional hotels, but also because travelers can share their living space while away. (See here.) In other words, as a result of the sharing economy, the same traveler on the same trip may realize economic benefits in his or her capacity as both a lessor and lessee.

The emergence of the “sharing economy” has provided large welfare gains to the economy as a whole. Consumers have additional, and often less expensive, options in everyday markets, and entrepreneurial activity has been created by ordinary people because Internet-enabled applications have vastly lowered the barriers to market entry.  

Professors Fraiberger and Sundararajan’s paper is significant in its use of empirical data to conclude that access to peer-to-peer rental markets has the effect of increasing savings for renters and increasing incomes for suppliers. While this economic effect of the “sharing economy” is beneficial to all market participants, it proves most valuable to low-income persons. The paper makes for an interesting read as well as a scholarly contribution to the limited academic literature regarding the new “sharing economy.”

Roadie May Be Another Beneficial "Sharing Economy" Service

It is interesting to think about the historical evolution of mail service in the United States. For many decades, people had no choice but to mail packages through the United States Postal Service (USPS). But the government-operated service proved to be sufficiently lethargic and inefficient that new entrants into the package delivery market were able to emerge and thrive. United Parcel Service (UPS) and FedEx provided consumers with alternatives that stressed faster delivery options, more accountability, and more transparency, especially as online tracking emerged.

But still, it can be time consuming to go to the local USPS, UPS, or FedEx office to deliver a package, so wouldn’t it be convenient if there was an additional option that incorporated picking packages up and other features? Well, there is.

Roadie, which describes itself as “the first neighbor-to-neighbor shipping network,” is the Airbnb and Uber version of mail service. In other words, like Airbnb and Uber, Roadie is another manifestation of the new “sharing economy” business models that are providing new options for consumers. These new services not only provide service options for consumers, but they also provide new sources of revenue for those “Roadies” carrying the cargo.

At the touch of a smartphone, with this new online application, users can find Roadie drivers who will pick up packages and deliver them to the desired destination. On its website, Roadie says: “Today 250 million passenger vehicles will hit the road with more than a billion square fit of unused cargo space. At Roadie, we wonder what would happen if we put just a fraction of that wasted capacity to good use.”

While the new service may seem feasible for only small trips, as opposed to cross-country shipping, you will be surprised. Check out Roadie’s footprint below just three weeks after its launch in November 2014.

Additionally, Waffle House recently partnered with Roadie to offer free waffles and coffee to Roadie drivers, according to a TechCrunch article. Because Waffle House restaurants are primarily located along interstate highways, this may incentivize additional productivity from the drivers. For example, a driver may be willing to work earlier hours or deliver a package to a faraway location if he or she knows coffee and a waffle are waiting for them along the way.

The addition of a new competitor in the delivery service market generally means consumers will enjoy the benefits of lower prices and higher quality service. Whether the new “sharing economy” competitor happens to be competing with the government (the USPS) or with legacy private sector businesses (FedEx or UPS), such new competition benefits consumers through lower prices and/or improved service offerings.

For example, with UPS and FedEx, consumers can track their packages through a series of checkpoints. This feature is certainly useful to many consumers and was an advance at the time it was introduced. But with Roadie, consumers can track their packages every second of the trip through GPS. There is also more accountability and transparency about issues such as damaged packages, driver backgrounds, and shipping costs because the information is accessible through Roadie’s application and website.

As my colleague, Michael Horney, and I wrote in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”

Instead of worrying about the worst possible outcomes that could happen from using the applications of these new emerging business models, public policymakers should focus tightly on addressing any real-world problems in the least intrusive, least costly way. If the focus of public policymakers is on the worst possible outcomes, entrepreneurs and consumers will be too afraid to try new things. Innovation will be stifled.

A positive shared vision for emerging technologies in the rising sharing economy requires a market-oriented perspective. This will foster the greatest amount of consumer welfare and consumer satisfaction among willing buyers and sellers.

This is applicable to the mail service market and the new Roadie application. If drivers do not perform adequately or if they engage in unsafe activity, consumers can opt for more traditional mailing services, such as UPS or FedEx. Similarly, any economic inefficiencies that exist in Roadie’s service likely will create an opportunity for other companies to emerge within the new “sharing economy” to offer similar delivery services.

With each day, the new “sharing economy” business models are providing more innovative choices to consumers in ordinary markets that have existed for many decades, whether with respect to Airbnb in the lodging market or Uber in the local transportation market.

It is exciting to see new online alternatives emerge in a number of markets as the “sharing economy” continues to grow. Ultimately, this benefits consumers who avail themselves of the services, those who provide the services, and the economy as a whole.

Flight-Sharing is the Latest Market on the Wrong End of Government Regulation

Flight-sharing is one of the latest services to emerge within the new “sharing economy.” Flytenow, a flight-sharing company, connects passengers with pilots who have empty seats on private flights for a fraction of the flights’ costs. Like Airbnb and Uber, which connect travelers with shelters and passengers with drivers, respectively, Flytenow can provide valuable services at the touch of a smartphone.

Sharing services, like these, provide additional consumer choice by disrupting traditional business models, and the emergence and popularity of such services has signaled to entrepreneurs that additional innovations are in demand. The new sharing economy services lead to increases in productivity for the overall economy and cost savings for consumers. For example, according to an Airbnb report on its impact in NYC, the company’s low prices have led to guests staying longer than they would have in a hotel. The average NYC Airbnb guest stays 6.4 nights, while the average NYC hotel guest stays 3.9 nights. These longer stays within the five boroughs have led to an additional $632 million in economic activity in one year in NYC alone.

Airbnb and Uber have come under regulatory scrutiny from many state and local governments (see here). Now, Flytenow is currently being regulated at the Federal level. According the Wall Street Journal, Flytenow is challenging the Federal Aviation Administration (FAA) in Federal court over the agency’s effective ban on its flight-sharing services.

Flytenow argues that it is not breaking any Federal laws or regulations because the FAA has always allowed private pilots to advertise flights and attract passengers as a means to cut down on expenses. But instead of using bulletin boards or newspapers, which apparently was legal in the past, users of Flytenow are advertising through the Internet. The FAA says that flight-sharing companies, such as Flytenow and Airpoolers, are subject to the regulatory standards that apply to commercial flights.

But Flytenow specifically sets forth the FAA regulation on its website: “Federal Aviation Administration regulations prohibit a pilot from accepting compensation from passengers. We help you split the costs, but you are not allowed to compensate the pilot further than that.” Flytenow argues that this cost-splitting operation makes flight-sharing services completely legal under Federal law.

It is understandable for regulators and government agencies to be cautious with regard to emerging technologies in order to protect consumers from certain identifiable risks.  But preemptive regulations often end up harming consumers by eliminating valuable services. As discussed in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”

If purveyors of sharing applications engage in harmful, unhealthy, or unsafe activities, competition is probably the most important regulatory mechanism to address any real problems. In competitive markets, poor consumer satisfaction generally means that a company will lose market share, or even fall out of the market. If a company is not operating safely or if it is putting its users in unhealthy conditions, a competitive market allows for unsatisfied consumers to choose alternatives.

It should not be unreasonable to think that flight-sharing services could operate in a similar manner to ride-sharing and shelter-sharing services. Hosts, drivers, and pilots should be able to price their services based on supply and demand. In the “The Sharing Economy: A Positive Shared Vision for the Future,” Free State Foundation President Randolph May and I suggested the following:

If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.

It is important for regulators to consider the costs and benefits of sharing services before restricting or outright prohibiting them. Preemptive regulations often lead to less consumer welfare than light-touch regulatory regimes that promote market-driven solutions that satisfy consumer demand while still providing redress for identifiable consumer hams. 

Gordon Tullock’s Contributions to Economics Will Always Live On

I am saddened to say that economist Gordon Tullock passed away on Monday in Des Moines, Iowa at the age of 92. Professor Tullock is often considered one of the fathers of public choice theory, which is the use of economics to solve traditional problems of political science.

Professor Tullock formulated the idea of “rent-seeking,” which most often is associated with the act of individuals and/or firms lobbying government for handouts, exemptions, or even regulations.  Rent-seeking is inefficient not only because it amounts to the government picking winners and losers in the marketplace, but also because the money used to lobby government could have been used in other ways to enhance consumer welfare.

Public choice theory is very applicable to the rule-making process. Voters, politicians, and regulators are all rational, self-interested individuals. Without questioning the intentions of FCC regulators, we should consider that adopting Net Neutrality rules would increase the FCC’s responsibilities, future budget, and overall power within the United States. Public choice theory tells us that public officials respond to incentives, such as these, in the same manner that private individuals do.

Professor Tullock also created the theory of the “transitional gains trap,” or the trap that individuals or firms fall into when protectionist government regulations are lifted. This is evident today in the sharing economy. (See “The Sharing Economy: A Positive Shared Vision for the Future”) Traditional hotels and taxicab drivers are worse off in regions where applications such as Airbnb and Uber have emerged absent government interference. These traditional businesses have spent thousands (or sometimes millions) of dollars to be protected by regulations and licenses, while Airbnb hosts and Uber drivers have not been subjected to the same rules. Even if regulations on traditional hotels and taxicab drivers were lifted (as they should be), it would still put the traditional businesses at a disadvantage due to the regulatory burdens they already have incurred. This is why traditional businesses have been calling for regulations to be levied on the sharing applications, despite that such regulations would inhibit competition and ultimately hurt consumers. The proper response in the face of new competition is to “regulate down,” not to “regulate up” to try to “level the playing field.”

As FSF Board of Academic Advisor Don Boudreaux said in a blog on Tuesday:

[Tullock had] one of the most creative, original, pioneering, fruitful, and insightful minds of the last 100 years. He deserved the Nobel Prize, but never got it.

Although Professor Tullock is gone, his contributions to the field economics will always live on.

Airbnb’s Positive Impact in New York

By Randolph May and Michael Horney

New York State Attorney General Eric Schneiderman released a report last week on Airbnb’s effect in New York City (NYC). In conjunction with the report’s release, he issued a press release with the following statement: “We must ensure that, as online marketplaces revolutionize the way we live, laws designed to promote safety and quality-of-life are not forsaken under the pretext of innovation. The joint city and state enforcement initiative is aimed at aggressively tackling this growing problem, protecting the safety of tourists and safeguarding the quality-of-life of neighborhood residents.” 

The key findings in the report do not provide convincing evidence that Airbnb’s presence presents a “growing problem.” In fact, they provide the opposite. Some key findings pulled from the Attorney General’s press release read:

“Commercial users run multimillion-dollar businesses”

“Gentrified neighborhoods account for vast majority of Airbnb revenue”

“Short-term rentals are displacing long-term housing options”

The phenomena described by these findings do not have inherently negative effects on the economy – or on NYC’s residents and consumers. In fact, the effects may well be positive.

“Commercial users run multimillion-dollar businesses” implies that individuals are taking advantage of entrepreneurial opportunities and providing valuable services to satisfy a consumer demand. Are traditional commercial hotels not running multimillion-dollar businesses? This finding sounds like increased competition in the lodging market.

“Gentrified neighborhoods account for the vast majority of Airbnb revenue” simply may mean that consumers value lodging in upscale neighborhoods if the price and location align with their desired lodging experience.

“Short-term rentals are displacing long-term housing options” is a market outcome that may simply reflect consumer preferences based on a variety of trade-offs regarding the available price, location, comfort, amenities, and options. In a leading tourist destination like NYC, it is not surprising that many consumers may value short-term rentals over long-term ones. This has a positive effect, not a negative one, because increases in short-term rentals bolster a growing tourism economy. (See FSF blog on Airbnb and European tourism here.)

But, according the Schneiderman, the most important finding from the report is that 72 percent of Airbnb transactions in NYC from January 2010 to June 2014 allegedly were “illegal hotels.” However, as explained in a paper written by Free State Foundation Research Associate Michael Horney and me, “The Sharing Economy: A Positive Shared Vision for the Future,” markets have efficient self-regulating mechanisms. Competition between Airbnb and other home-sharing applications like Roomorama and VRBO and traditional hotels and inns creates a “check-and-balances” system to help ensure quality service. Additionally, Airbnb specifically provides mechanisms to help ensure quality service, such as a feedback rating system and a $1 million insurance policy.

As Attorney General, Schneiderman’s perspective is that so-called “illegal hotels” are automatically bad because his job is to enforce the law. But consumers are not forced to use Airbnb; they voluntarily choose to use Airbnb’s application engage because they value its service. If “illegal hotels” were harmful to consumers than the revenue from Airbnb transactions ($282 million estimated for 2014) would not be increasing year-to-year.

This is not an argument for ignoring valid laws or regulations, even one that may need updating or repeal to account for new digital age circumstances.  But apparently, Airbnb has been compliant throughout the whole investigation by providing the data used to produce Schneiderman’s report.  And, according to a New York Times article, Airbnb spokesman Nick Papas said: “We need to work together on some sensible rules that stop bad actors and protect regular people who simply want to share the home in which they live.”

In our view, New York State’s law which prohibits New Yorkers from renting out their apartments for less than 30 days without being present may not be sensible considering the vast amount of tourism and business that occurs in NYC. In addition to the self-regulating mechanisms it has instituted, Airbnb is also subject to health, safety and consumer protection laws and regulations of general applicability. Therefore, there is no reason to suspect that unsafe and unhealthy conditions for consumers will become prevalent, even in what Mr. Schneiderman characterizes as “illegal hotels.”

The most important conclusion to be drawn from Attorney General Schneiderman’s report may be one he does not intend to highlight: Airbnb is much more important for the NYC economy than most people realize. And this conclusion ought to lead to the derivative conclusion that the 2010 law banning short-term rentals and any other outdated regulatory impediments should be changed to allow for this important economic activity to benefit visitors as well as New York residents who wish to share their residences.