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In the early days of the Internet, services such as eBay and Craigslist revolutionized secondary markets, making it easy for individuals to buy and sell used goods. Among other devastating results, the classified ad went the way of the dodo (and with it much of the revenue that subsidized printed newspapers). Now we’re in the midst of the next generation of such services, which make it possible for individuals not just to dispose of used assets but to rent, lease, or loan their belongings to other consumers, without the need for much if any corporate infrastructure.
This idea of peer-to-peer commerce, or the „sharing economy” as it is sometimes known, has spawned a new breed of innovations. Start-ups are now facilitating short-term borrowing of such expensive but often under-utilized possessions as apartments and homes, cars (or just a ride), power tools, and even, on sites such as TaskRabbit, personal expertise.
An existential issue looms over them: Is the sharing economy even legal? And if not, should laws and regulations be reformed to allow it to exist?
These are not rhetorical questions. Regulators — often spurred into action by incumbents threatened by the new competition — have cast jaundiced looks in the direction of every one of the new sharing economy services, in some cases ruling them in violation of long-standing laws. In some cities, for example, sharing economy services have been banned under laws that prohibit unlicensed hotels, taxicabs, and other professional services.
Airbnb, an accommodation matching service first launched in 2008, has recently come under heavy fire just as — not coincidentally — its revenue is taking off.
The site’s early ambitions were modest — provide a website for cash-strapped out-of-towners to find cheap places to crash, a form of budget travel known as couch-surfing. But casual rental of part or all of a „host” house or apartment is now big business. Airbnb growth has been doubling in shorter intervals for some time; last year, it booked 12 to 15 million „spaces.”
A recent study found that Airbnb and similar services have gone from gimmick to disruptor in record time, offering real competition for traditional hotels with rates that average 20-50% below market price in most cities. The company now operates in 190 countries and 28,000 cities, and its founders expect the service to grow to 100 million annual bookings and revenue of $1 billion. (The site charges both host and guest service fees for each stay, based on a percentage of the total price.)
Those numbers have been a wake-up call for the hospitality industry, and for the local regulators who are responsible for ensuring lodgings are licensed and taxed, and meet minimal standards for health, safety, and hygiene. Airbnb’s hosts aren’t subjected to any of these rules, the industry complains, and should be.
Like other sharing economy innovators, Airbnb is now at the center of a legal maelstrom in citiesaround the world. In Airbnb’s home town of San Francisco, tax collectors say hosts haven’t paid any of an estimated $1.4 million in hotel taxes or registered as businesses. And New Orleans considers Airbnb listings in the French Quarter to violate laws against „rentals” of less than 60 days.
Last month, the service suffered a serious blow when New York’s Environmental Control Board ruledthat an Airbnb host had violated the city’s transient hotel law, which prohibits the rental of rooms or apartments for less than 30 days. (The New York case is ironic in that the 2011 law was enacted to stop landlords from converting apartments into more lucrative hotel rooms — to protect tenants, in other words.)
If the ruling stands and the city takes a more aggressive approach to enforcing the law, it could spell the end of Airbnb in New York. Though the company wasn’t a party to the proceeding, its lawyersappeared at the hearing to argue on behalf of the host. Airbnb and the host plan to appeal.
Whatever the outcome in New York and other cities where the service is under attack, the bigger legal questions about Airbnb can’t be answered easily. Should individuals be allowed to occasionally rent out their apartments or spare rooms without any legal oversight? Or should they be subject to the full suite of laws that govern hotels and other full-time lodging services, including „real” B&B’s?
On the one hand, laws that require licensing and regulation for temporary lodgings were designed to protect travelers from being ripped off, or being subjected to unsafe or unsanitary conditions (fire codes, public health codes, etc.). Enforcing these legal standards is an expensive task for city governments, on that depends on the collection of hospitality taxes.
On the other hand, as often happens, laws aimed at protecting hotel consumers have morphed into rules that protect the regulated hotel industry from some forms of competition, either with each other or, as here, with a new form of more casual lodging.
For its part, Airbnb says its hosts and guests are already well-protected. But in the absence of any licensing, standards, or inspections, how can the company be so confident that abuses aren’t already taking place or won’t in the future?
In part, the answer comes from applying more technology.
Airbnb, it turns out, isn’t simply matching buyers and sellers. The service also requires hosts to provide verifiable identification, and offers guests 24/7 customer service in case anything goes wrong. Users also rate and review each other. Payments go directly to Airbnb, not the host. And the company provides a $1,000,000 insurance policy against damage caused by guests. These are precisely the kind of quality and safety controls that city regulators enforce for traditional lodgings, and for which they collect taxes. But using the same technology that makes the service possible, Airbnb has replicated much of the regulatory structure in what is arguably a more efficient format.
But is that enough? And shouldn’t governments, in any case, have some say over whether new kinds of transactions are exempt from old rules, or whether Airbnb’s technology-based regulation is sufficient? Or do individuals have the right to opt-in to alternate systems of private government, unless and until something goes very wrong?
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Given the inefficiency and protectionist features of traditional rules, I’m inclined to grant the sharing economy broad latitude to test its innovative approach to improving asset efficiency. For one thing, the success of disruptive innovators often inspires incumbents to implement long-overdue innovations of their own. And regulated incumbents are especially prone to inertia — inertia shared by regulators, who are even less likely to look for opportunities to improve their efficiency.
Still, it’s worth remembering that traditional laws, at least in principle, are designed not only to protect individual consumers but also to create public perceptions that someone is watching out for those at risk — to minimize what economists call „negative externalities.”
There may be such a thing as too much efficiency, for example. Venice in the summer now resembles an amusement park more than a city, with visitors packed so tightly that no one actually gets to experience the charm they all came for. In the case of lodgings, residents who rely for income on the tourist industry have a strong interest in ensuring that visitors don’t have a bad experience, no matter where they stay. There’s some value to regulations that maintain that sense of well-being, in other words, even if they aren’t implemented in the most cost-effective way.
Perhaps consenting guests should be free to accept any conditions at an appropriate price. But don’t bet on local authorities or the services they have long regulated to disappear or transform overnight. For every transaction cost the sharing economy eliminates, expect two or three new ones to appear in the form of legal obstacles — even if they’re only transient.