Local Government Blog Essay

The Sharing Economy and the Upside of Disrupting Local Governance

We tend to think of states as the classic site of Brandeisian experimentalism, but cities, counties, towns and other local governments — by virtue of their number and variety, their sensitivity to local conditions and preferences, and their capacity to respond to the immediacy of emerging policy challenges — are equally, if not more, important policy laboratories.  The disruption wrought by the rise of the sharing (or platform) economy provides a particularly vivid real-time opportunity to peer into those labs and watch the oft-neglected mechanics of policy experimentation in action, with some broader lessons for regulation and innovation.

The rapid growth of Uber, Lyft, Airbnb, and a myriad of similar companies is not only upending significant aspects of urban mobility, short-term rentals, personal services, lending, and other sectors — although it is certainly doing that.  The sharing economy is also creating distinctly local regulatory tensions and testing local governance in highly visible ways, with sharing companies finding themselves embroiled in high-profile conflicts in New York, Austin, San Francisco, and other cities in the United States, as well as globally in London, Paris, Berlin, and elsewhere.

One narrative that has emerged in the wake of this turmoil is that of lawless companies run amok, and there is no denying that many platforms have skirted or even openly flouted regulations, as Uber’s notorious Greyball program underscores.  But as local governments have reacted to the challenges and regulatory disruption caused by the sharing economy — particularly in the arenas of short-term rentals and ride sharing — another story is developing: we are seeing a range of creative approaches to balancing regulation and innovation and to addressing a variety of distinctly local concerns.

Examples of this experimentation can be found across the country.  Many local governments have begun to craft targeted licensing or permit requirements to manage the local impacts of short-term rental usage, including Portland, New Orleans, and Charlottesville.  Similarly, local governments have been absorbing transportation network companies (TNCs) and their drivers into existing urban mobility regulatory structures.  For example, New York City, after working through some growing pains and initial conflict, now allows TNCs to operate within preexisting regulatory categories, which require that drivers obtain the same license as traditional taxi drivers, as well as special license plates.

In larger cities like New York, the threat of losing a significant market may drive sharing economy firms to acquiesce to regulations they actively resist in other locales.  In contrast, Uber and Lyft chose to pull out of Austin, Texas in response to a local law requiring fingerprint-based background checks for drivers.  In the period between their departure and the passage of state legislation preempting local control over TNCs, several homegrown ride-sharing apps willing to abide by the new requirements entered the market.  Such developments can strengthen the hand of local officials who seek to address public-safety concerns through stricter regulation but fear backlash from constituents who rely upon TNC services.  They also reveal how, in some cases, stricter local regulation might ironically enable innovation and foster new market entrants, providing at least some check on the possibly monopolistic tendencies of dominant international platforms.

Beyond directly imposing regulatory requirements, local governments have also experimented in other ways with policies affecting how sharing economy firms operate.  Seattle, Washington — a city with relatively strong worker protections — passed an ordinance in 2015 (which is currently on hold pending legal challenge) that would enable TNC and taxi drivers to unionize and bargain collectively.  Such an innovation, should it be allowed to take effect, holds promise for empowering individual service providers.

In other cases, cities have found ways to enlist platform technology to improve the provision of local services or aid in regulatory compliance.  Some cities have responded to the sharing economy and a trend of declining public transit use by developing “on demand” public transportation networks, relying on the same digital technology that drives sharing economy platforms.  Some cities, in the United States and elsewhere, have brokered agreements through which Airbnb directly collects and remits lodging taxes. And in New Orleans and San Francisco, Airbnb hosts can apply directly for required licenses and registration certificates through the Airbnb website.

These local regulatory responses have been shaped by a variety of factors, including the existing local political economy, the relative power of local incumbents, the particular local externalities sharing firms are generating, and the structure of local authority.  Yet even as a significant share of these initial responses can be attributed to unique local considerations, the most successful innovations are being refined and transformed as they spread to other localities.

In the face of this varied landscape of local responses, states, often pressured by significant lobbying efforts from firms seeking a lighter regulatory touch, have begun to remove or significantly limit local authority to respond to the sharing economy, particularly in the realm of ride sharing.  At least thirty-seven states have, to some degree, preempted local regulation of TNCs, and some states have preempted other aspects of the sharing economy.  This increasing tendency to displace local regulation risks stymieing regulatory and policy innovation.

State preemption also threatens to curtail potential benefits that the disruption caused by the sharing economy might bring to local governance more generally. First, the scale of change and the regulatory frictions the sharing economy has created have served a useful purpose by highlighting inefficiencies in existing regulatory regimes.  While the challenge of adapting to new technology and innovative businesses is hardly a new dynamic for local government, it is an arguably underappreciated benefit of disruption.  As local governments react, the sharing economy is forcing more transparency about regulatory objectives and regulatory fit, with local governments facing new questions about the costs and benefits of existing regulatory regimes.  Again, notwithstanding the adage that you can’t fight city hall, local governments are challenged on regulations with some regularity, but the sharing economy is shining a particularly bright light on central aspects of traditionally local regulation for a national and even global audience — attention that is, for the most part, quite salutary.

Second, although it is too early to undertake any kind of comprehensive analysis of the impact of the regulatory choices cities and other local governments have made, it is fair to say that the sharing economy has generated genuine policy creativity and that we are still in the early stages of an iterative process.  There can be legitimate reasons for states to set uniform requirements in some areas, particular to set regulatory floors to protect employees and consumer welfare.  But given the intensely local nature of so much of the sharing economy, we should be cautious about displacing local authority to respond to local conditions too readily and too fully.

Finally, access to the vast quantity of data obtained by sharing firms can enable cities to craft more responsive and effective transportation, economic development, and housing policies, addressing core areas of traditionally local concern.  Vancouver, Canada recently imposed limits on short-term rentals to address concerns regarding housing prices and a shortage of long-term rentals.  Airbnb has argued that its own data indicates many of the units now prohibited from being listed on the site will not end up available to long-term renters; local governments have to be able to respond.  Recent empirical work is providing a clearer picture of Airbnb’s effect on local housing markets.  However, the issue of data sharing has proven particularly contentious as sharing economy firms broker agreements with local governments.  State preemption of local regulatory authority can prevent cities from entering regulatory compromises with sharing economy firms through which they are able to obtain access to important data — data that will enable localities to craft more effective and targeted regulation.

In short, the sharing economy is providing rich insights into emergent dynamics of disruption and regulation and the possibilities for broader public engagement with the local regulatory process.  This process can be messy and, as with any set of experiments, mistakes are no doubt being made and blind alleys pursued.  But there has been sufficient promise in the innovation we’ve seen in the local regulation of the sharing economy to merit allowing local experimentation to continue.

Of course, having peered into the laboratory, it is appropriate to close by noting that when local governments operate in this kind of experimentalist mode, they need to be, well, scientific about it — rigorously testing the costs and benefits of regulatory approaches, engaging in the kind of peer learning that has happened in areas such as public health and other areas, and actually coming to grips with which experiments have worked — and which have not.