Public Policy Forum Blog

Local government and the sharing economy

At first glance, it seems as if The Economist, in a recent post titled “The sharing economy: Remove the roadblocks,” is warning me that local government is setting up barriers to community sharing. The article bemoans the fact that disruption[i] in the service sector (and primarily taxi and room-rental businesses) has given rise to what is known as the sharing economy, and is being needlessly strangled by government regulations. Says The Economist:

"The truth is that most of the rules that the sharing economy is breaking have little to do with protecting the public.”

Let’s look at that claim by better defining the business model in the sharing economy. I would argue that “the sharing economy" is a misnomer because services aren't being shared--they are being rented for a price. Companies like Uber and Lyft (in the taxi business) and Airbnb (in the room-rental business) aren't sharing with neighbors and friends, they're renting things. Or rather, they are creating mediated platforms that enable renters and owners to find each other and then engage in a market transaction. The companies own nothing beyond their platform technology. These mediated transactions are not shares between friends; they consist of two strangers exchanging money.

By setting themselves up as "mediators only,” platforms are rewarded by taking a percentage of the revenue that exchanges hands, but they have no need to accept any risk that accompanies the exchange. They neither own the product nor are responsible for its condition and delivery. A better name might be the “exchange economy.”

It can be argued that this platform-exchange model produces a compelling need for government regulation because business risk is shifted from the platform companies to other entities. Those who take on the risk include partners in the transaction (the owner and the renter), government, and the public.

Regulation is needed to mitigate, adjudicate, and apportion these risks. For example, drivers for Lyft must obtain their own individual car insurance that is more expensive than the bulk insurance for which cab companies are able to contract. Similarly, if a guest at an Airbnb stay burglarizes the owner, local government is called upon to work out a complex situation where entry was legally gained. Finally, the public bears the burden when car-share services don’t pay taxes to support local roads..

For the most part, government rules and regulations have come into being in order to protect and serve the public interest. They’re not all out to preserve an existing monopoly or represent historical graft. In the past, the public has asked that hotels not be firetraps, that taxis don’t break down in the middle of an intersection, and that city planners take into account compatible land uses and zone accordingly.

Maybe there is a way for a responsible application of technology for what I'm calling intentional disruption. This would be disruptive innovation that takes into account democratic institutions and regulations that have grown up to serve the public good.

Starting a taxi service, for example? A review of the rules and regulations that have grown up around the service might shed light on what part of the public is being protected, and what regulations need to be re-worked. A review of taxi ordinances in most large cities gives a glimpse of what public goods they are trying to ensure—the vehicles are safe, the drivers can't discriminate based on geography, and companies must make their rates transparent to the public. How would a platform-only car-sharing service incorporate these public goals into its business model? If it doesn’t, we’ll likely just end up re-inventing government regulations all over again as lawsuits reach critical mass.

 

[i] Market disruption is a term made popular by Clay Christensen’s book, The Innovator’s Dilemma. Disruption is defined as the introduction of a product that addresses a market that previously couldn’t be served, or offers a simpler, cheaper, or more convenient alternative to an existing product. The defining feature is that the business model of the incumbent in the market makes it almost impossible to respond to a disruptive product. 

 

Author: 
Virginia Carlson