[Together with Chris Berg this article was published at OECD Insights]
The ‘sharing economy’ has emerged because new technologies such as the internet have drastically reduced transaction costs.
Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.
Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions. These businesses make money by taking a fee for facilitating the trade.
Why has the sharing economy emerged? The underlying reason is transaction costs – the costs of coordinating an exchange. This includes the discovery, bargaining, and policing costs of exchange.
As these costs fall it becomes more feasible for consumers and producers to transact. Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience. Hence the emergence of the ‘sharing economy’.
These companies do not sell the ‘resources’ mentioned above. Rather, they sell the software, the matching algorithms, and the reputation of their business. This package provides a service where private parties can discover, bargain and police their own transactions.
Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange: more sustainable use of scare resources by utilising idle capacity; often lower costs for consumers because of decentralised transactions; the ability to customise the details of the exchange; and flexible employment opportunities particularly for the unemployed.
But the future of these benefits is all but smooth sailing. The debate involves regulators, governments and incumbent industries. This is expected with any disruptive innovation. Incumbent industries scramble to protect their valuable position using the political process.
The underlying question of these debates is not really over whether the sharing economy has economic benefits. The question is over who is more effective at regulating emerging markets – governments or civil society?
A recent report by the Melbourne-based free market think tank the Institute of Public Affairs, The sharing economy: how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.
Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.
To be sure, these debates over government imposed control and evolving self-regulation will continue. But it is not sufficient to approach each issue on a case-by-case basis; decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.
This post provides three such design principles.
Regulation should not be by default; it should be the second alternative if bottom-up governance fails.
Regulators must avoid hasty regulation. Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry. Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.
Some may recognise this as Adam Thierer’s idea of Permissionless Innovation. Governments too often follow a ‘precautionary principle’ – that is, regulating against the possibility of hypothetical harm. This locks entrepreneurs into rigid rules that stifle innovative activity.
The sharing economy has a large potential for self-governance. This is an alternative to government control. It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.
These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures. It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.
Moving away from occupational licensing as a signal of quality
Occupational licensing is government deciding who can supply what services in the market. Licensing is often justified on the basis that it signals quality and safety for consumers.
This is all well and good, but occupational licensing also has costs. It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.
The sharing economy has created significant tension around occupational licensing. This is because private parties can now easily provide services – like transport and accommodation – through unconventional and decentralised markets.
The solution is to encourage alternative approaches such as professional certification to signify quality. Certification does not legally prevent individuals from providing certain services; it allows the market to decide. The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.
We must encourage the sharing economy to create, test and refine their own certification bodies. For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile. These need to be embraced.
Make regulation technology-neutral to avoid entrenching industry structure
Technology-specific regulation only survives the test of time when there is little innovation. Yet traditional industry structures are continually being displaced. Creative destruction is a good thing.
However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.
Many sharing economy regulatory contests come down to questions such as ‘what is a taxi?’ or ‘what is a bank?’ As industries shift and innovate, these definitions blur. But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.
If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.