Should Local Governments Support the Sharing Economy?

Companies in today’s so-called “sharing economy” face legal battles across the country with state and local regulators. But according to the authors of a new working paper, these companies may come to find state and local governments are their closest allies.

As it now stands, the sharing economy might also be called the “controversy economy.” Taxi-drivers accuse Uber, the ride-sharing app, of unfair competition. Hotels challenge Airbnb, the apartment-sharing website, with claims of tax fraud and illegal operation. Customers allege that Zipcar, the car-sharing company, uses deceptive business practices.

As a result, many state and local governments have joined the battle against sharing companies, attempting to develop new regulatory schemes or even banning these companies altogether. Meanwhile, many sharing companies face public relations struggles as they become increasingly hostile toward regulation.

Yet with time, and as the sharing economy grows in popularity, things may change. Although it is unlikely that new sharing companies will go on unregulated, they may win active support from state and local governments, according to a recent working paper by Daniel Rauch of Yale Law School and David Schleicher, an Associate Professor of Law at George Mason University School of Law. The authors predict that, in coming years, state and local governments will actively subsidize the sharing economy in an attempt to increase public goods and redistribute resources.

According to Rauch and Schleicher, the industries that sharing companies have penetrated most—transportation, housing, and restaurants, for example—are usually subject to extensive local-level interest and support. Through appropriate subsidies and regulations, local governments may be able to harness these new companies to advance urban development goals.

Rauch and Schleicher explain their rationale with an analogy to sports stadium subsidies. They argue that sharing companies can generate the same popular support among city residents that sports teams generate because sharing companies create “two-sided markets” for public goods.

Although fervor surrounding two-sided markets isn’t exactly the same thing as sports team fandom, it does offer opportunities for local communities. In two-sided markets, residents are not only consumers, but they effectively become co-producers of “spare power tools,” “idle cars,” and other goods or services that they already have on hand and can then transform into profits.

Residents also can benefit from the “world-class” reputation that sharing company services can bestow on cities. Rauch and Schleicher argue that cultural centers, like sports stadiums, attract well-educated and highly skilled human capital, suggesting these centers are an “economically essential” investment for cities. Similarly, a network of thriving sharing companies can bring the same “on-the-map-ness” that large sports stadiums bring to cities.

However, sports stadium subsidies are not without critique. Rauch and Schleicher recognize these critiques, including a lack of demonstrated job growth and city revitalization. Predictably, many sharing companies face similar criticisms.

Technology-driven sharing systems currently target wealthy consumers, so the benefits often are not well distributed. They arguably also drive up transportation and housing prices for all people, and they face criticism for espousing progressive values while servicing “good old [corporate] greed.” On a map of Uber routes in New York City, the wealthiest parts of Manhattan and Brooklyn are illuminated in a fury of usage. The Bronx, considered by some to be the poorest borough, is largely invisible.

Still, Rauch and Schleicher argue that the sharing economy may be used to benefit low-income residents and the urban poor. Similar to how cities can require that residential developers provide housing units at affordable prices, local governments could require that sharing companies provide “expanded operations in poorer areas, mandated discounts in such areas, or hiring advantages for workers from disadvantaged backgrounds.”

Sharing companies argue that citizens already see these redistributive qualities. Uber claims that it provides more cars in the city’s underserved areas than traditional taxis, and Airbnb says it brings millions of dollars to less visited areas in New York City. With the proper redistributive requirements, Rauch and Schleicher argue, cities can use sharing companies to bring wealth and opportunity to all residents.

Rauch and Schleicher go further to claim that local governments should begin working with sharing companies to provide government services. Already, they say, cities are beginning to take advantage of sharing company services, including paying for ZipCar memberships for city employees and sharing construction equipment with other municipalities. By capitalizing on sharing company systems, local governments can reduce their own expenses.

Although the working paper does not recommend specific policies, Rauch and Schleicher state that it is time for all players—governments, companies, and individual citizens alike—to shift their approach to the sharing economy. Rather than fighting against local regulation, they recommend sharing companies become less oppositional to local government and instead seek opportunities to enhance their businesses by obtaining “rents and contracts through lobbying and bidding.” At the same time, they argue that policymakers and citizens should consider what they want from these companies and, using the best available data, decide which policies they might want to pursue in the future.