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How Should Government Regulate The Sharing Economy?

Sept. 7, 2013
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Lyft and UberX, peer-to-peer ridesharing services, began operating in the Twin Cities this month, but only in St. Paul. They are avoiding the Twin Cities’ other half because if they operated in Minneapolis, they would have to register as a taxi service. The regulatory split between the Twin Cities is a curious situation, and makes us wonder: how should government regulate sharing economy companies like Lyft, Uber and Airbnb?

As sharing economy companies have grown, they have faced numerous regulatory obstacles. In Dallas and Washington DC, for example, undercover police have cited Uber drivers for violating city code. Earlier this year, a New York judge ruled to make the renting of apartments on Airbnb illegal. Sharing economy companies often violate existing laws and policies and governments—understandably—are worried about consumer safety and diminishing tax revenue.

Even so, many governments realize the sharing economy’s potential, and are enacting policies and regulations to both protect consumers and support the growth of sharing economy companies. In California, the state is proposing rules that would legalize ride- and car-sharing companies, but would institute stringent safety requirements. Denver is also hoping to promote car-sharing by allocating scarce downtown parking spots to car-sharing vehicles.

Oftentimes government regulation of the sharing economy is viewed as an all-or-nothing debate. Some believe that government regulation is unnecessary because technology enables reputation systems and self-monitoring tools, which allow sharing economy participants to self-regulate. Others, such as taxi unions, believe that sharing economy companies are illegal and need to be banned. When we asked sharing economy experts for their opinion, most fell somewhere in between:

  • Collaborative Lab’s Chief Strategy Officer, April Rinne, believes that sharing economy companies must work together with the government to develop proper regulatory measures. Whereas excessive regulatory measures wouldl stifle innovation, an absence regulatory measures will create unpalatable amounts of risk that will scare off investment:

“Many of the laws and policies that exist today are outdated, awkward and clumsy. I’m not, however, trying to put them down. Most of these laws were drafted before companies operating in the sharing economy, and many pre-date event the Internet. No wonder it’s difficult to address these new ways of transacting.

“Going forward, we need to update rules and provisions so that they promote innovation and acknowledge the new value that’s being generated thanks to collaborative consumption activities. This doesn’t necessarily mean scrapping old laws. It really depends on the sector and issues at play. We could imagine a combination of supplementary rules, exemptions and new laws over time.

“It’s also important to develop nimble rules that include feedback loops to help gauge efficacy over time. Since the sharing economy is still nascent in many places, it is also necessary to engage in broader awareness-building and data collection. And of course, not all sharing economy participants are the same — for example, it includes both monetized and non-monetized platforms — and we need to allow for growth and innovation to blossom across the spectrum.”

  • University of Pittsburgh Business Professor Catherine May Lamberton feels that the sharing economy offers opportunities for levels of consumer protection even higher than traditional markets:

“For government, the fact that some sharing systems replace taxable commodities (taxis, hotels) means that public services stand to lose money. Arguably, sharing systems reduce the overall demand for some of the public infrastructure that such taxes support – if everyone were to share rides, traffic would be reduced. Over time, infrastructure expenditures could be reduced. However, at present, it could be argued that sharing systems aren’t really changing the amount of public resources that are used. They’re just shifting the way in which they’re used from a taxed to a non-taxed exchange. So, government somewhat understandably wants to regulate sharing systems – if they don’t, tax revenues will fall. And as with any other form of income, government is likely to expect a portion of revenue. I’m not sure that we should expect that sharing-related revenue would be immune from taxation, even if we see sharing systems as somehow ‘outside the market.’

“Of course, there’s also pressure from the traditional exchange industry to regulate sharing systems. If Lyft is going to threaten taxis, taxis won’t like it. That purpose, I think, is less pro-social in its effects – if we are to believe that consumers should have the option to choose the best way to meet their needs, we have to allow new options to gain market share. Otherwise, we’re creating exactly the kinds of barriers to innovation that politicians claim to want to reduce. If regulation sets up these kinds of barriers, we’re actually distorting the market’s ability to let older, more inefficient market structures cede ground to more innovative, efficient options. That seems to me difficult to justify, regardless of the side of the political aisle on which one stands.

“The most potentially pro-social reason to regulate sharing systems is to protect consumers. However, I’d argue that in fact, the exact things that make sharing systems work is the thing that makes consumer protection regulation less necessary than in other exchange contexts. First, the legal aspects of sharing systems that protect consumers are not very different than any other type of transaction, and thus, existing law would already apply. A contract remains a contract, negligence remains negligence, and fraud remains fraud. Consumers should be as careful in sharing systems as they would be in any purchase situation, and the law will provide protection in the same way. Second, as many authors have noted, most thriving sharing systems have robust platforms for reporting bad behavior. Reputation drives success. So, participants are automatically motivated to police their own systems and to behave within the system’s norms. Taken together, existing contract law and the power of reputation should serve to protect participants to the same, if not a greater extent, than we see in standard market exchanges.”

  • According to Director of Corporate Communications Steve Webb, when Turo, a car-sharing service formerly known as RelayRides, developed its business model, it was in its best interest adhere to standards even stricter than government regulations:

“Trust and Safety, or providing a safe and secure marketplace for our members, is the lifeblood of RelayRides and the broader sharing economy. When we started RelayRides, we needed to go the extra mile to make sure our insurance product, fraud protections and other member protections create a secure marketplace for owners and renters. In other words, it was in our own best interest to create a safe and secure marketplace, which is why many of our driving requirements are more conservative than state laws and why our insurance is often multiple times more than what is required by states.”

  • Janelle Orsi, author of Practicing Law in the Sharing Economy, believes that the government must differentiate between large-scale sharing economy companies and smaller ones:

“At a time when job opportunities are scarce, sharing economy companies like AirBNB are opening up a vast new realm of opportunities for people to make livelihoods in creative ways. As such, cities, states, and the federal government should make reasonable space for the nano-enterprises that the sharing economy companies are enabling.  Home-based B&Bs should be allowed to a reasonably extent, fee-based ridesharing and carsharing should be allowed to a reasonable extent.

“The challenging part is determining what “reasonable extent” means in a wide variety of contexts, weighing many factors and concerns. The government must continue to ensure health and the safety of consumers, the fair treatment of workers, and the safety and order of our neighborhoods. However, a line must be drawn to distinguish between regulations that apply to large-scale companies and regulations that should apply to the nano-enterprises of the sharing economy. Every governmental agency in the U.S. should be learning about the sharing economy and exploring ways to amend regulations to make reasonable space for economic innovation.”

  • Andrew Pontti, Consumer Educator at Sunrun believes that regulation should encourage new ideas:

“The sharing economy brought us innovative products and services that we actually want, but entrenched business interests view this progress as a threat and have actively tried to stile it. Sunrun has faced incredible challenges from monopoly utilities that have tried to stop rooftop solar growth because they hold a monopoly on how people get electricity. For example, despite the fact that two-thirds of California home solar installations now occur in low and median income neighborhoods, utilities walk the halls of Sacramento pointing to decade-old data suggesting solar is only for the rich. These utilities exhibit so-called “rent-seeking” behavior where companies look to the government and regulators to protect their interests from innovative competition. But regulation should protect and encourage new ideas. When we encourage growth instead of stopping it, we preserve consumer choice and support our country’s position as a global leader in innovation.”

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