Regulating Sharing Economy: 3 Suggestions to Promote Innovation

We Learned to share resources. Now it is time share regulatory approaches.

By Paulius Jurcys and Prof. Shinto Teramoto

Sharing is a natural human behavior. In recent years we have witnessed the emergence of business that are built on the idea of sharing surplus resources. Airbnb, Uber, Spotify and Netflix are just few of the examples. This new paradigm is now commonly defined as sharing economy.

Sharing economy turned up as market’s response to the problem of omnipresent unused resources. A closer look to the available data shows staggering extent of unused resources. For instance, there are 2,753 dams in Japan; yet, only 663 of them are used to generate electricity. One of the main reasons for such a dam surplus is industry’s conflicts with proprietors of water rights.

Such surplus of underused resources permeates various sectors of economy (real estate, means of transportation, music and creative content, etc.) and provides a fertile ground for innovation in the ways we use those resources.

The proliferation of innovative sharing models largely has been hampered due to rigidity of governments and markets in adapting themselves to changing behaviors of ownership and consumption. In many cases, sharing economy businesses face stringent regulatory requirements and are often accused for “bending the law” or “operating in the shadow of the law”.

Disruptive business models based on the idea of sharing of surplus resources would spread faster if regulators around the world would be more willing to “think out of the box” and adopt incentive-based regulation. This requires regulators to reckon that sharing economy will continue to push the limits of the law due to constantly changing patterns of human behavior and conditions that underlie the growth of sharing economy.

Platforms that Fuel Sharing

Sharing economy would not have emerged without the Internet. Digital communications technologies significantly curtailed the costs of sharing information. Online intermediaries contributed to building online platforms that connected users at distant locations and facilitated new forms of communication.

Some online intermediaries managed to create “matching” platforms that connect the owners or managers of surplus resources with third parties who are willing to have a temporary access to those resources. Such platforms enabled the owners of surplus resources to reap additional benefits by transferring the cost of maintenance of those resources to third parties. The users of those resources pay what they deem to be a reasonable amount for temporary access to resources.

The commercial viability and success of such matching platforms depends on their ability to utilize e-trust. In order to eliminate uncertainty among members of ICT networks, sharing economy platforms introduce various methods for users to evaluate safety and quality of available surplus resources as well as trustworthiness of other members of such sharing platforms.

Sharing Economy is Here to Stay

Trust-based matching platforms open new opportunities for collaboration and in finding new ways to increase the efficiency in sharing available resources. Sharing economy not only reduces prices, but also provides the consumers more opportunities to choose what products or services best match their needs. More generally, innovation in sharing of surplus resources prompts more sustainable development of economies around the world.

Expansion of business models based on the notion of sharing reflects more extensive changes in human behavior and and preferences. High costs of living in large cities facilitates people search for more practical ways of living. This explains why people are less willing to make huge investments and prefer quick access over costly ownership.

Changing values, consumer preference and new platforms of information sharing nudge firms to gradually adjust their businesses. For instance, General Motors Company invested $500M to launch Maven, a subsidiary company providing car sharing services. Similarly, in June 2017, Ford Motor Company entered into a partnership with Motivate to provide bike sharing services in the City of San Francisco and the Bay Area.

More recently, we can witness the confluence of different sharing economy businesses. For example, car sharing operator Getaround partners with Uber to make it easier for people who do not own a car to rent one for a short period a time while they are working as drivers for Uber. In October 2017, Airbnb announced partnership with WeWork to lure business travellers. Airbnb also is partnering Miami-based Newgard Development Group to build a 324-unit Airbnb-branded building where apartment owners will be encouraged to sublet their properties.

3 Guidelines on How to Regulate Sharing Economy

Legal battles are fought across industries with regard to the legality of disruptive sharing economy business models. Regulatory agencies fear that new businesses may pose a threat to public interest (e.g., affordable housing in highly populated areas or health and safety of workers and customers). In order to fend-off potential competition, established businesses highlight that sharing economy business operators do not meet statutory requirements for commercial activities.

We suggest that in regulating new business activities, the governments should follow these three guidelines.

i) Sharing Economy Requires Fresh Regulatory Approaches

The regulators should accept the fact that sharing economy has become an inevitable part of the global economy. More importantly, the regulators should acknowledge that the role of sharing-based businesses models is gradually increasing and is going to affect every segment of national economy. Rather than being a threat, sharing economy opens new opportunities for collaboration and sharing. Thus, traditional regulatory frameworks need to be reconsidered, and new regulatory approaches should be designed specifically for sharing-based economic activities.

ii) Application of Cost-and-Benefit Analysis

Regulations of sharing economy businesses should be adopted based on the proper cost and benefit analysis. The Executive Order №13563 issued by President Obama in 2011 encourages government agencies to reasonably determine that benefits of the proposed regulation justify its costs and make sure that regulations impose the least burden on society. If the agency is making a choice among alternative regulatory approaches, those approaches that maximize net benefits.

More importantly, in designing regulatory framework for disruptive sharing economy businesses, agencies should, to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt and identify available alternatives to direct regulation. For instance, rather than posing restrictions or banning certain activities, agencies should provide economic incentives to encourage the socially acceptable behavior (e.g., user fees or marketable permits, or providing information upon which choices can be made by the public).

iii) Reduction of Initial Compliance Costs

Examples of legal battles fought by Airbnb or Uber in various jurisdictions show that the number of required permits and the burden to provide necessary information is one main reasons that deter new players from entering into the market or delaying the entrance. Furthermore, the authors suspect that the continuous compliance cost to be borne by existing operators in the market are too low to nudge them to exit the market even if their are commercial activities are not optimal.

Hence, in designing regulatory framework for sharing economy, regulators should identify regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the developers of disruptive businesses. Regulators should aim to eliminate requirements which may be redundant, inconsistent, or overlapping. This would help reduce initial compliance costs for new market entrants who have the potential to offer a viable competition to existing market players operating at suboptimal levels.

Look to the Future

Sharing economy marks a new episode of economic development. The ideas of sharing and collaboration opens the gates for new business opportunities and contribute to a more sustainable use of omnipresent surplus resources. In order to facilitate the expansion of sharing regulators should look for more creative ways towards the governance by assessing costs and benefits of legislation and adopt more flexible regulations with an objective to create more incentives for the proliferation of disruptive business models. More generally, it would be desirable if regulatory agencies around the world could work more closely in setting up homogenous approaches with regard to regulation of sharing economy.

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