The sharing economy is growing faster than ever and becoming a hot policy topic these days. I’ve been fielding a lot of media calls lately about the nature of the sharing economy and how it should be regulated. (See latest clip below from the Stossel show on Fox Business Network.) Thus, I sketched out some general thoughts about the issue and thought I would share them here, along with some helpful additional reading I have come across while researching the issue. I’d welcome comments on this outline as well as suggestions for additional reading. (Note: I’ve also embedded some useful images from Jeremiah Owyang of Crowd Companies.)

1) Just because policymakers claim that regulation is meant to protect consumers does not mean it actually does so.

1. Cronyism/ Rent-seeking: Regulation is often “captured” by powerful and politically well-connected incumbents and used to their own benefit. (+ Lobbying activity creates deadweight losses for society.)
2. Innovation-killing: Regulations become a formidable barrier to new innovation, entry, and entrepreneurism.
3. Unintended consequences: Instead of resulting in lower prices & better service, the opposite often happens: Higher prices & lower quality service. (Example: Painting all cabs same color destroying branding & ability to differentiate).

2) The Internet and information technology alleviates the need for top-down regulation & actually does a better job of serving consumers.

1. Ease of entry/innovation in online world means that new entrants can come in to provide better options and solve problems previously thought to be unsolvable in the absence of regulation.
2. Informational empowerment: The Internet and information technology solves old problem of lack of consumer access to information about products and services. This gives them monitoring tools to find more and better choices. (i.e., it lowers both search costs & transaction costs). (“To the extent that consumer protection regulation is based on the claim that consumers lack adequate information, the case for government intervention is weakened by the Internet’s powerful and unprecedented ability to provide timely and pointed consumer information.” – John C. Moorhouse)
3. Feedback mechanisms (product & service rating / review systems) create powerful reputational incentives for all parties involved in transactions to perform better.
4. Self-regulating markets: The combination of these three factors results in a powerful check on market power or abusive behavior. The result is reasonably well-functioning and self-regulating markets. Bad actors get weeded out.
5. Law should evolve: When circumstances change dramatically, regulation should as well. If traditional rationales for regulation evaporate, or new technology or competition alleviates need for it, then the law should adapt.

3) Sharing economy has demonstrably improved consumer welfare. It provides:

1. more choices / competition
2. more service innovation / differentiation
3. better prices
4. higher quality services  (safety & cleanliness /convenience / peace of mind)
5. Better options & conditions for workers

4) If we need to “level the (regulatory) playing field,” best way to do so is by “deregulating down” to put everyone on equal footing; not by “regulating up” to achieve parity.

1. Regulatory asymmetry is real: Incumbents are right that they are at disadvantage relative to new sharing economy start-ups.
2. Don’t punish new innovations for it: But solution is not to just roll the old regulatory regime onto the new innovators.
3. Parity through liberalization: Instead, policymakers should “deregulate down” to achieve regulatory parity. Loosen old rules on incumbents as new entrants challenge status quo.
4. “Permissionless innovation” should trump “precautionary principle” regulation: Preemptive, precautionary regulation does not improve consumer welfare. Competition and choice do better. Thus, our default position toward the sharing economy should be “innovation allowed” or permissionless innovation.
5. Alternative remedies exist: Accidents will always happen, of course. But insurance, contracts, product liability, and other legal remedies exist when things go wrong. The difference is that ex post remedies don’t discourage innovation and competition like ex ante regulation does. By trying to head off every hypothetical worst-case scenario, preemptive regulations actually discourage many best-case scenarios from ever coming about.

5) Bottom line = Good intentions only get you so far in this world.

1. Just because a law was put on the books for noble purposes, it does not mean it really accomplished those goals, or still does so today.
2. Markets, competition, and ongoing innovation typically solve problems better than law when we give them a chance to do so.

[P.S. On 9/30, my Mercatus Center colleague Matt Mitchell posted this excellent follow-up essay building on my outline and improving it greatly.]

Additional Reading

• Randolph J. May & Michael J. Horney, “The Sharing Economy: A Positive Shared Vision for the Future,” Free State Foundation, Perspectives from FSF Scholars, Vol. 9, No. 26, July 30, 2014.
• R.J. Lehmann, “The Sharing Economy Will Thrive Only If Government Doesn’t Strangle It,” Reason, August 2, 2014.
• Andrew Moylan and R.J. Lehmann, “Five Principles for Regulating the Sharing Economy,” R Street, Policy Study No. 26, July 2014.
• Eli Lehrer & Andrew Moylan, “Embracing the Peer-Production Economy,” National Affairs, 2014, p. 51-63.
• Arun Sundararajan, “Why the Government Doesn’t Need to Regulate the Sharing Economy,” Wired, October 22, 2012.
• Matthew Mitchell and Michael Farren, “If you Like Uber, You Would’ve Loved the Jitney,” LA Times, July 12, 2014.
• Daniel M. Rothschild, “How Uber and Airbnb Resurrect ‘Dead Capital,’” The Umlaut, April 9, 2014.
• Daniel M. Rothschild, “Renters and Rent-Seeking in San Francisco,” Technology Liberation Front, April 15, 2014.
• [podcast] Michael Munger on the Sharing Economy, EconTalk, July 7, 2014.
• video of Michael Munger talk on the Sharing Economy, September 25, 2014.
• John C. Moorhouse, “Consumer Protection Regulation and Information on the Internet,” in Fred E. Foldvary & Daniel B. Klein (eds), The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues (Cato Institute, 2003).
• Rachel Bostman, What’s Mine is Yours: The Rise of Collaborative Consumption (2010).
• Jeremiah Owyang, A Glossary of Emerging Terms in the Collaborative Economy, August 29, 2014

There was a very interesting front-page article in the Wall Street Journal yesterday by Julia Angwin and Geoffrey Fowler wondering whether Wikipedia, the wildly popular online encyclopedia, was dying because of new posting guidelines which have apparently led to a drop off in the number of volunteers contributing to the site. In their article (“Volunteers Log Off as Wikipedia Ages“), Angwin and Fowler note that:

In the first three months of 2009, the English-language Wikipedia suffered a net loss of more than 49,000 editors, compared to a net loss of 4,900 during the same period a year earlier, according to Spanish researcher Felipe Ortega, who analyzed Wikipedia’s data on the editing histories of its more than three million active contributors in 10 languages. Eight years after Wikipedia began with a goal to provide everyone in the world free access to “the sum of all human knowledge,” the declines in participation have raised questions about the encyclopedia’s ability to continue expanding its breadth and improving its accuracy. Errors and deliberate insertions of false information by vandals have undermined its reliability.

The article suggests that new posting and editing guidelines may have something to do with the drop:

But as it matures, Wikipedia, one of the world’s largest crowdsourcing initiatives, is becoming less freewheeling and more like the organizations it set out to replace. Today, its rules are spelled out across hundreds of Web pages. Increasingly, newcomers who try to edit are informed that they have unwittingly broken a rule — and find their edits deleted, according to a study by researchers at Xerox Corp. “People generally have this idea that the wisdom of crowds is a pixie dust that you sprinkle on a system and magical things happen,” says Aniket Kittur, an assistant professor of human-computer interaction at Carnegie Mellon University who has studied Wikipedia and other large online community projects. “Yet the more people you throw at a problem, the more difficulty you are going to have with coordinating those people. It’s too many cooks in the kitchen.”

Let’s say it’s true that the new guidelines have resulted in fewer people contributing.  Is that that automatically a bad thing?  I suppose it depends on other variables that are harder to measure. Namely, quality metrics. This is where every discussion about Wikipedia gets sticky. Personally, I’m a big Wikipedia fan and think it represents crowdsourcing and online collaboration at its finest.  But I’m not one of those Internet pollyannas who claims Wikipedia represents the pinnacle of human knowledge or some sort of proof that the collective “hive mind” produces better results that individual or proprietary efforts. Rather, I think both models and modes of production have their place and their own strengths and weaknesses.  The value of Wikipedia lies in the sheer diversity of human interests covered. The staggering array of topics for which someone has seen fit to create an entry never ceases to amaze–and inform–me.

But not all entries are equal, and some are downright pathetic.  That being said, if you treat Wikipedia as a launching pad– and not the ultimate destination–for your investigation of an issue, then this isn’t a problem.  Most people understand that there are other sources out there to consult, and Wikipedia entries typically do a nice job pointing readers to many of the best things to look at for additional information or perspectives. And even if the entry does not offer outbound links, you’re still free to search for other sources!  But for the vast majority of topics under the sun, a Wikipedia entry now exists and offers a great place to begin–again, not end–your search for enlightenment.

Nonetheless, the quality issue for Wikipedia remains a problem for many. Personally, I welcome Wikipedia’s recent changes and think it’s a sign that the Wikimedia Foundation takes quality control seriously.  If, in an effort to improve the quality of entries, new posting guidelines result in small drop-off in the number of contributors, some of us can live with that.  The question is: Does it diminish Wikipedia’s overwhelming strength–diversity.  I’d hate to think that certain niche topics go uncovered because new guidelines are overly restrictive.  Regardless, I think the folks at the Wikimedia Foundation are on the right track here.

Post script: Over at ZDNet, Larry Dingan asks “Is Wikipedia Maxed Out?” and wonders whether crowdsourcing has certain inherent limits. But he points out that even it it does, it still has benefits:

The larger question is whether crowdsourcing has a cap or not. Is there a point where crowdsourcing gets so big that it crumbles under its own weight? It’s a worth asking the question, but let’s put this in a little perspective. If Wikipedia somehow imploded it would still be one of the best examples of the Web at work. For corporate purposes, you could crowdsource R&D, get huge, perhaps create some neat products and dismantle if it got unwieldy.

I think that’s spot on.