The Sharing Economy: Disruptive Effects on Regulation and Paths Forward

Urs Gasser, 06 Jun 2016

Just as the sharing economy is disrupting many traditional economic models and relationships, it is also creating misalignments between existing regulations and the harms they are meant to prevent.

The same forces that are upending business models are creating challenges for regulators around the globe. Increasingly, the laws written to regulate taxicabs, hotels, and other industries fit poorly with the new platforms, providers, and consumers using the sharing economy. Regulators must adapt and address these misalignments by viewing regulation not as a binary choice between more or less intervention, but as a range of regulatory tools that need be carefully adjusted to fit the diverse ecosystem of new business models, producers, and platforms.

1. New Innovations and New Stakeholders

One of the most powerful elements of the sharing economy is how it has enabled innovative services that simply would not have been possible without the emergence of new platforms connecting potential consumers with under-utilised property or skills. In the absence of a platform such as Uber or Lyft, it would be difficult to make an income roaming the streets in an unmarked car hoping to find strangers in need of a ride.

Moreover, as more people all over the world increasingly become comfortable arranging and paying for services online, it has made it feasible to offer highly specialised, niche services that might not scale in traditional markets. In Jakarta, Indonesia, which has one of lowest rates of taxis per person in Asia, the sharing economy enables a company like Ojek Syari to connect female drivers with Muslim women who are uncomfortable with male drivers. This ability to bring together people who might otherwise not be consumers with people who might otherwise not be producers is both a strength of the sharing economy but also a source of regulatory challenges.

Traditional regulations often assume a particular set of producers and a particular set of consumers. The sharing economy, however, is upending those assumptions and creating a misalignment in regulation. New platforms are creating new stakeholders in need of protection, and those same platforms are transforming previously effective self-regulatory systems into barriers to innovation. In both cases, these misalignments need to be addressed.

2. New Stakeholders in Need of Protection, New Problems in Need of Remediation

Traditional regulations are designed to protect certain vulnerable relationships or address particular problems that emerge from those relationships. For example, non-discrimination and common carrier regulations for hotels are designed to protect travelers or others whose need for accommodations and lack of negotiation leverage makes them particularly vulnerable to predatory practices. These traditional regulations often protect weaker consumers against large, professional, business savvy service providers.

In the sharing economy, however, both the consumer and the provider may be in need of regulatory protection. What protections keep Uber drivers safe from abusive riders? What protections help a homeowner after an Airbnb guest destroys their property? Non-professional service providers can be just as vulnerable to harm as consumers, but traditional regulation overlooks these new market participants, creating a misalignment that leaves many stakeholders vulnerable.

Additionally, the sharing economy is creating negative externalities that traditional regulation is often ill-equipped to address. For example, ride sharing can lead to increased road noise, pollution, and traffic. And short-term rentals, like Airbnb, can lead to increased noise and foot traffic in apartment buildings or quiet neighborhoods. Regulations like zoning laws are effective at keeping big hotels out of residential neighborhoods, but they frequently have little to say about renting out an apartment or house for a week or two. Some cities have tried to reduce these negative externalities by tweaking existing regulations. San Francisco, for instance, has limited the number of days a dwelling can be rented. But these approaches can be overly restrictive, creating a misalignment.

3. Old Models of Self-Regulation as a Barrier to Innovation

Before the sharing economy, traditional regulation often operated hand-in-hand with professional organisations and guilds that would self-police their industries to ensure quality services. Depending on the industry, professional organisations might establish standards, ethics, and licensing requirements, administer licensing exams, collect fees, or even take punitive actions against bad actors. The sharing economy does not fit neatly into this traditional model, creating a misalignment of regulation. In response to lower-cost competition from the sharing economy, these professional organisations have often created barriers to innovation, encouraging stricter regulations or outright bans.

The battle between the taxicab industries and ride-sharing platforms highlights this misalignment. Typically, taxi quality was controlled through cooperation between governments and large taxi fleet companies. Governments could limit competition through exclusive medallions, administer licensing exams for drivers, and set insurance requirements and other standards; fleet operators could ensure vehicles were safe and could identify and discipline dangerous drivers. Ride-sharing threatens this balance. As long as they exist outside of traditional taxi regulations, ride-sharing drivers do not buy expensive medallions, take special licensing exams, or carry expensive commercial insurance, enabling them to offer services at lower costs.

This misalignment has often provoked the taxicab industry to push for stricter regulation of ride-sharing. In the US, multiple cities including Miami, Houston, Portland, Austin, and New Orleans have outright banned services like Uber. Other cities, such as Minneapolis and Detroit, have subjected ride-sharing services to taxicab regulations. In the EU, Belgium and Germany have banned ride-sharing services, with a German court calling it unfair competition for local taxis. And in Singapore, the Transport Minister recently initiated a review of ride-sharing services out of concern that the government may need to “level the playing field” to protect traditional taxi drivers1.  Not everyone agrees that the proper response to the misalignment is stricter regulation. Neelie Kroes, Former EU Commission Vice President for Digital Agenda, argued that the Belgian ban on ride-sharing served to protect the “taxi cartel” and stifle innovation3.

Addressing these misalignments is critical. Effective regulations should keep both consumers and producers safe. And effective regulations should reduce negative externalities without suppressing productive innovation. Given these competing tensions, where do policymakers begin in realigning outdated regulatory systems?

4. Realigning Regulation Through An Array of Regulatory Tools

Although the sharing economy contributes to a misalignment between markets and regulation, it simultaneously provides policymakers with more flexible tools for more effective regulation. Governments that are able to adopt these flexible approaches to regulation will be best positioned to take advantage of the opportunities of the sharing economy. These flexible approaches include: (1) enabling new forms of self regulation; (2) creating flexible regulations; and (3) investing in innovation.

A. New Technological and Platform Approaches to Self Regulation

Self regulation has long been a core element of traditional markets and services. For example, in order to protect investors and securities trading, the US financial industry, with approval from the US Congress, regulates itself through the Financial Industry Regulatory Authority (FINRA). And as described above, taxi commissions frequently rely on taxi companies to maintain fleets and regulate driver behaviour. But as the sharing economy has disrupted traditional self-regulatory models, it has created opportunities for new self-regulatory approaches that rely on new technology and new platforms.

Self regulation is most effective when it places responsibility with the entities that have the best incentives to regulate, have the greatest pool of information from which to identify negative actors or behaviour, and are best positioned to take corrective action. In many cases, sharing economy platforms have the right incentives, an incredible amount of information, and are best able to control those consuming and providing services through their platforms. For that reason, new technological and reputation-based mechanisms of self regulation can be a key tool for regulating the sharing economy.

  • Incentives: Sharing economy platforms rely on user trust. Consumers will not return to platforms if they have a bad experience. If a short-term rental is in much worse condition than how it appeared on the rental platform, consumers will feel cheated and deceived. Even more seriously, high publicity cases like the Uber driver convicted of rape in Delhi, India in 2015 have not only generated bad publicity for the platform, but have also catalysed government opposition to the services. For that reason, sharing economy platforms are often highly incentivised to regulate the quality of services on their platform.

  • Information: Sharing economy platforms can tap into significant pools of data in order to improve their self regulation. Platforms can use reputation systems, user ratings, social network analysis, and a variety of other analytical tools to collect and assess information about the consumers and providers on the platform. For example, Airbnb’s “Verified ID” system, asks some users to provide photos of government identification or links to other social network platforms. Although this data collection can sometimes be intrusive, it can also empower platforms, producers, and consumers to make more informed decisions in a powerful feedback loop. Consumers can choose highly rated producers, just as producers can choose not to work for poorly rated consumers. And platforms can continue to improve the quality and fairness of the data they collect and their ratings methodologies.

  • Ability to Act: Platforms are in a powerful position to take action. Not only can they remove access from poorly behaving actors, but they can also regulate each transaction. For that reason, platforms are in a better position to regulate tax payments and monitor compliance with local laws than government agencies. The platforms can also offer economies of scale and centralisation that can help their non-professional consumers and producers who might otherwise struggle to understand when to collect taxes or how to get commercial insurance. In fact, all of these factors can work in concert; Airbnb, for example, shares with insurance companies de-identified data about its hosts in order to provide them with insurance. 

There is tremendous opportunity for self-regulation in the sharing economy, but it is by no means an exhaustive regulatory solution. First, the incentives to self regulate do not fall equally across all stakeholders. For example, a ride-sharing platform may have less incentive to ensure fair wages or reasonable hours for drivers, particularly if there is a surplus of potential drivers. Similarly, absent external regulation, platforms may lack the incentives to provide less profitable services, such as handicapped accessible services or services in low-income neighborhoods. Second, the technological tools of reputation systems may reinforce existing biases. A reputation system that looks at the strength of social network connections, for instance, may be biased toward those with higher incomes and larger networks.

B. Adapting Regulations for Greater Transparency and Broader Protections

Given that self regulation is not a complete solution to these regulatory misalignments, there remains a need for flexible regulations that address the gaps where self-regulation is insufficient. Often, these new regulations focus on improving transparency or adapting existing regulations in ways that are more inclusive of the new participants in the sharing economy.

  • Transparency: Improving transparency in the sharing economy can help all participants make better and more efficient decisions. For example, 2014 regulations in Amsterdam require short-term rental platforms to work with hosts to prominently display relevant laws and regulations around the rental property. Similarly, a 2016 regulation in London requires ride-sharing platforms to provide fare estimates before the ride begins.

  • Inclusiveness: Expanding the inclusiveness of regulations can help remove ambiguity from existing regulations that do not clearly apply to the new kinds of participants in the sharing economy. For example, Amsterdam and San Francisco have recently clarified that short-term rental platforms are responsible for collecting and remitting local taxes on behalf of hosts. Similarly, London recently required that ride-sharing platforms provide live customer support for fielding consumer complaints. These regulations place obligations on some of the new participants in the sharing economy (particularly the platforms) that existing regulations did not contemplate.

These forms of regulation demonstrate an approach that is more nuanced than simply leaving the sharing economy unregulated, regulating the sharing economy under existing regulations, or banning it outright. In fact, in several of these cases, the regulations were developed with the input and collaboration of various stakeholders, including the platforms themselves.

C. Supporting the Sharing Economy Through Regulation

Some jurisdictions have begun to recognise that not only can flexible regulation of the sharing economy help contain its more harmful aspects, but it can also become an advantage. These policymakers have realised that the decisions that they make with respect to regulating the sharing economy will in turn impact the extent to which their region benefits from the innovation and positive impacts of these new markets.

In many respects, the approach that policymakers take with respect to the sharing economy is tied to their approach to supporting technology and innovation more broadly. After Belgium banned Uber, Vice President Kroes stated that the ban “sends a bad anti-tech message about Brussels, which is already in the 4G dark ages3.”  Policymakers and regions that are viewed as hostile to technology, innovation, and the sharing economy may find it harder to attract startups and benefit from innovative new services.

By contrast, some policymakers are actively using regulation as a tool to attract innovative new businesses. For example, the Seoul city government recently announced plans to spend USD 240000 supporting and promoting sharing economy startups. It can be difficult to prevent harm while also creating a regulatory environment that does not punish innovative companies that do not fit neatly into existing regulations. However, some policymakers are working to find the right balance and are even investing public money into supporting the growth of those innovative companies.

5. Rewarding Regulatory Flexibility

Innovative sharing economy businesses often operate in spaces that do not clearly fit into existing regulatory categories. This poses a challenge for regulators. Leaving these new markets unregulated is usually not an option; it is important to make sure that vulnerable consumers and producers are protected and that negative externalities are reduced. Additionally, regulation can be important to ensure that access to the benefits of the sharing economy is not limited to certain geographic regions, incomes, physical abilities, or other characteristics. The difficulty is in providing these protections in a way that does not stifle innovative new technologies and services.

Legal scholar Orly Lobel has observed that “policymakers have been experimenting with more participatory and collaborative models of regulation, in which government, industry, and society share responsibility for achieving policy goals. Under this model, platform companies can be viewed as partners, rather than adversaries, of the legal process4.”  Policymakers who can offer more flexible regulatory approaches will be most likely to address the misalignments in regulation while simultaneously encouraging the growth of sharing economies. This may involve embracing self regulation where it makes sense and where it takes advantage of technological advantages inherent in new platforms. And where self regulation is insufficient, it may involve flexible new regulations that boost transparency and ensure vulnerable producers and consumers are protected. In many cases, these regulations can be developed in cooperation and with input from a variety of stakeholders.

Across the US, Europe, and Asia, the kinds of markets most impacted by the sharing economy are those with a history of significant top-down regulation: transportation, lodging, employment, and others. Because of that, at this early moment in the history of the sharing economy, the challenges and misalignments in each region are relatively similar when viewed from a bird’s eye perspective. However, as the sharing economy grows, regulators that can move beyond command and control regulatory systems and can orchestrate the wide range of regulatory tools available will be best able to deliver on the benefits of the sharing economy while avoiding its pitfalls.

 

1. Eileen Yu, “Singapore review of ride-sharing economy should be about protecting consumers, not taxi operators,” ZDNet, Oct. 21, 2015, http://www.zdnet.com/article/singapore-review-of-ride-sharing-economy-should-be-about-protecting-consumers-not-taxi-operators/.
2. Nick Summers, “EU Commission VP Neelie Kroes is ‘outraged’ by Uber ban in Belgium [Update],” The Next Web, Apr. 15, 2014, http://thenextweb.com/eu/2014/04/15/european-commission-vice-president-neelie-kroes-says-shes-outraged-uber-ban-belgium/.
3. Id.
4. Orly Lobel, The Law of the Platform, Univ. of San Diego, Legal Studies Research Paper Series, Mar. 2016, available at http://ssrn.com/abstract = 2742380.

Author

Urs Gasser

Executive Director, Berkman Center for Internet & Society, Harvard University and Professor of Practice, Harvard Law School

Urs Gasser is the Executive Director of the Berkman Center for Internet & Society at Harvard University and a Professor of Practice at Harvard Law School. He is a visiting professor at KEIO University (Japan) and taught at Fudan University (China) and the University of St. Gallen (Switzerland). He serves on the board of the NEXA Center for Internet & Society at the University of Torino, the Research Center for Information Law at the University of St. Gallen as well as the Digital Asia Hub in Hong Kong, among others. Dr. Gasser has published extensively on law and policy issues in the digital age, including “Born Digital: Understanding the First Generation of Digital Natives” (Basic Books, revised 2016) and “Interop: The Promise and Perils of Highly Interconnected Systems” (Basic Books, 2012, with John Palfrey). He advises governments, international organizations, and companies on digital transformation issues.

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