Firms in Sharing Economy Should be Regulated Under a Modified Framework

Experience tells us that borrowing a friend’s car for the weekend is different from renting a car from a rental company. However, making a distinction like this with respect to sharing economy businesses, like Uber and Airbnb, appears to be stumping government regulators around the country. Do sharing economy businesses fall into an entirely new category, or are they simply different in degree from their more traditional predecessors like taxicabs and hotels? I believe that the answer to this question will determine how difficult it is to regulate these enterprises and how quickly it can be done. The sharing economy uses Internet platforms to allow individuals to offer or buy goods and services from each other directly for short periods of time. For example, you can rent out your home while you are on vacation or your car while it would otherwise be parked in a garage. If regulators view the sharing economy as just another expression of industries that they deal with every day, the Ubers and Lyfts of the world might have less reason to worry about crippling regulatory burdens ahead. Likewise, for regulators trying to grapple with this new sector, using an existing regulatory framework will make their jobs easier. Unfortunately, Brian Chesky, the co-founder and CEO of Airbnb, told The Atlantic recently that the development of the sharing economy is a difference in kind—no less than a complete transformation of cities and the way people relate to one another and engage in commerce: At the most macro level, I think we’re going to go back to the village, and cities will become communities again. I’m not saying they’re not communities now, but I think that we’ll have this real sensibility and everything will be small. You’re not going to have big chain restaurants. We’re starting to see farmers’ markets, and small restaurants, and food trucks. But pretty soon, restaurants will be in people’s living rooms. For the benefit of regulating the sharing economy, I hope this vision of fundamental transformation isn’t true—or even believed by regulators. If it is, it may be years, even decades, before regulation catches up. Just look at how long it took the Federal Aviation Administration to acknowledge that Kindles had an “airplane” setting. However, the New York Attorney General recently sued Airbnb for violating an existing New York City regulation that prohibits rentals for periods shorter than thirty days. Based on this action, it appears that New York is viewing Airbnb more like a hotel than like a person inviting her friend from college to crash on her couch. While at first blush the Attorney General’s classification might look like a problem of overreaction, I think that Airbnb can actually capitalize on being categorized as a hotel. How so? Well, consider the regulation of another sector: the residential construction industry. Like the sharing economy, the residential construction industry has been notable for its high degree of atomization and participation by small, mostly individual businesses. Most builders of one- and two-family residential buildings are individual homebuilders who build a few homes a year, and such work may or may not be the builders’ sole occupation. Most commercial buildings, by contrast, are built by larger companies whose sole business is construction. Regulators concluded long ago that the permitting and building code requirements for residential and commercial classes of construction should be different, not only because of the type of construction, but also because of the entity performing the work. As a result, the differences in the regulation of the two classes of construction amount to a difference in degree, not in kind. In Pennsylvania, both residential and commercial buildings must apply for building permits. However, stamped architectural plans are required for commercial buildings, but not for one- and two-family detached dwellings. Likewise, the national model building codes, used in most states, have a separate code for residential and commercial construction, but both sectors must comply with building codes of some kind. How should this model apply to sharing economy businesses? Eric Biber and J.B. Ruhl recently argued that administrative “general permits” are one possible solution for regulating the sharing economy. However, I would advocate a model more like that found in the regulation of the construction industry. Instead of a new type of regulation or approval altogether, there should be different tiers of existing requirements for the same goods and services, much like the different requirements for a building permit for residential versus commercial construction. New York state, for example, already requires a hotel to obtain a “temporary residence” permit. Instead of creating a new permitting system, there could be a different set of requirements to obtain a temporary residence permit for very short-term, sporadic rentals like Airbnb. Likewise, most cities require taxicabs to have “medallions” allowing them to operate within a certain geographic area. These medallions are auctioned off to the highest bidder. I could easily envision an auction of temporary driver medallions. While the sharing economy will undoubtedly require tweaks to existing regulations, I think it would be helpful for supporters of the sharing economy if regulators viewed its innovations less as a revolutionary disruptions that must be grappled with and controlled and more as just another expression of highly atomized industries that they or their counterparts in other sectors deal with on a regular basis