The sharing economy: Scale and regulatory arrangements

The sharing economy: Scale and regulatory arrangements

Phuah Eng Chye (18 November 2018)

One aspect of regulating the sharing industry that has attracted the attention of academia has been the unique challenges presented by the ability of platforms to coordinate the activities of millions of individuals on a real-time basis. In this context, Kellen Zale contends “scale is a defining feature of the sharing economy, and that effective governance of the sharing economy requires a more complete understanding of the role of scale. The sharing economy is not just about what two individuals do. It is about what millions of people are doing, and the cumulative impacts of those activities on affordable housing, public infrastructure, and civil rights.”

Kellen Zale notes that “as the sharing economy becomes an increasingly large segment of the public accommodations and transportation markets, the traditional ways we distinguish between activities that we should regulate and those we treat with regulatory leniency no longer fit. Existing regulatory systems, from civil rights and environmental law to consumer protection and tax law, do not map neatly onto the configuration of scale in the sharing economy”.

He points out “the massive number of small-scale activities facilitated by these platforms is also resulting in negative cumulative impacts and exposing regulatory fractures, from the loss of long-term rental housing to discrimination against protected classes to increased burdens on public infrastructure”.

In this context, most activities are subject to two-tier differential regulation with small-scale activities granted “reduced stringency, either exempting them outright or subjecting them to lowered levels of regulatory oversight”[1]. This is because small-scale activities are perceived to offer manifold benefits such as innovation, job creation and economic vibrancy while recognising they may be too small to afford burdensome regulation.

While differential regulatory regimes work reasonably well in addressing the dilemma of disproportionate regulatory burden from one-size-fits-all regulation, it faces unique challenges from sharing where the coordination of individual actions increases their systemic impact. The default choice is to allow these activities to continue unregulated as the alternative (of regulating the many individual actors) is difficult and prohibitively expensive under traditional regulatory regimes.

In exploring regulatory arrangements, Kellen Zale suggests one way in which “governance can adapt and respond to scale in the sharing economy” is through co-regulation. He defines co-regulation as “a collaborative regulatory effort that utilizes industry to implement regulatory standards.” “Co-regulatory governance is recognition of the reality that private companies like Airbnb and Uber are already becoming de facto regulators of certain sectors: Airbnb is approaching a role as the de facto regulator of spare housing capacity, and Uber and Lyft are becoming de facto regulators of quasi-public transportation.”

There are many precedents for private firms to take on a role as co-regulators. For example, major exchanges are designated as Self-Regulatory Organisations (SROs) and possess regulatory powers formally delegated by law. Obligations are imposed on exchanges to “exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets”. They are also “subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities”.[2]

The arguments used to advocate co-regulation in the sharing industry are similar to those used for self-regulation in the financial industry; namely that government regulation is blunt and slow-moving while self-regulation by the private sector is adept and responsive. In addition, technology platforms offer the advantage of crowd participation. Kellen Zale argues sanctions imposed by sharing platforms is more effective than government sanctions because they make “two-way feedback available to all members, or removing users who violate network norms from membership in the network”. In the context of managing investor risks, control systems on crowd-financing platforms rely on feedback and capping investment amounts rather than the more traditional approaches.[3]

However, co-regulation presumes the sharing platforms are willing to take on regulatory duties. In fact, it is just the opposite with sharing platforms generally resisting attempts to foist responsibilities onto them; claiming they are mere information intermediaries. Kellen Zale notes “to date, these companies are largely not accepting the responsibilities that come with being regulators, such as the need for transparency and accountability.”

He points out “local and state governments may also be wary of entrusting platforms with regulatory oversight based on the less than exemplary behavior of some platforms with respect to transparency and full disclosure. And although co-regulatory approaches like platforms facilitating the collection of taxes may seem like an easy economic choice, regulators in a number of jurisdictions have expressed concerns that legitimizing the tax aspects of short-term rentals may undermine other regulatory goals…concerns such as balancing short-term efficiency gains with long-term public needs and proper oversight of platforms.”

Some blame the apparent irresponsible behaviour on the entrepreneurial-technology culture. Nonetheless, it is evident there is a tension arising from the inherent conflict of interests between the commercial objectives of a for-profit entity and the burden of achieving regulatory goals. For example, when the SRO exchanges converted from being member-owned mutuals to becoming for-profit and listed entities, at times they were perceived to have been reluctant to enforce regulation that would hurt their business.

As boundaries evaporate in the sharing economy, there will be a growing need to clarify the role of government agencies and industry players. In particular, reorganising regulation is urgent because regulatory agencies are facing a squeeze on their finances while their need for resources is growing as the industry conditions become more complex and unstable. A large part of the reorganisation relates to how regulators are able to use information to achieve public goals.

References

Kellen Zale (7 November 2016) “When everything is small: The regulatory challenge of scale in the sharing economy.” San Diego Law Review, Forthcoming; U of Houston Law Center No. 2016-A-23. https://ssrn.com/abstract=2866044

International Organization of Securities Commissions (IOSCO) (May 2003) “Objectives and principles of securities regulation”. http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf

Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information societyhttp://www.amazon.com/dp/B01AWRAKJG

Phuah Eng Chye (29 July 2017) “The significance of information effects”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/the-significance-of-information-effects/

[1] Kellen Zale

[2] IOSCO. Pages 12-13 set outs the principles for self-regulation

[3] Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

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