Session Description:

Synergies and efficiencies abound in what’s known as the “sharing” or “on-demand” economy. But without trust and a social safety net, it can collapse. This transition in consumption and digital labor leads some to foresee a new world of empowered entrepreneurs, but to others portends an economy of exploitation. Either way, it poses new challenges of regulation, taxation, governance, investing and wealth distribution. What policies should apply to these collaborative economies?

Sundararajan: Over the last decade, we’ve seen the emergence of a wide range of on-demand, peer to peer, sharing economy services that are starting to create viable substitutes for goods and services delivered through traditional firms, traditional institutions across a wide range of industries. And so many of these examples are familiar to us: Kickstarter for philanthropic crowdfunding, AngelList and Circle for equity crowdfunding, Funding Circle and Kiva for peer to peer lending, a whole host of short-term accommodation alternatives ranging from a couch on Couchsurfing to an apartment on Airbnb to, you know, a high-end home in London through Onefinestay, a traditional Korean home through Kozaza. You know, many of us took Uber here today. And what’s interesting to me is we’re starting to see personal services extend beyond someone coming to pick you up in a car through your Uber or your Lyft or your Sidecar, or Ola in India or Hailo around the world.

There’s a set of diversified personal services platforms that have emerged. Handy, Homejoy, Jobrunners, TaskRabbit—will sort of send home a variety of service providers ranging from home cleaning to like, you know, someone to do home improvement, to organizing your apartment to doing your accounting. And very recently, we’ve seen these personal services sort of ramp up a notch, where if you don’t want to ship your stuff yourself, you take a picture of it through the Shyp app, someone will come and pack it up for you and ship it for you. If you want something picked up locally in an hour, Postmates will go and get it for you. It’s sort of like a modern day version of that dot-com era, you know, “anything delivered in an hour” company, Cosmo.

If you don’t want to park your own car, Lux will send a valet to where you are by tracking you on GPS and park your car for you. Once you get home, Washio would’ve done your laundry and delivered it to you, Munchery will send you a meal. If you’re not feeling well, Heal will send you a doctor. If you want to relax a little more, Zeel will send you a massage therapist. If you want to relax even a little more, Drizly will send you alcohol. And then there’s my favorite, Eaze, that will give you on-demand medical marijuana. Which my friends in Manhattan tell me is not a new app, but that’s just sort of—you know, I have no personal information about that.

So this sort of motivated the “Wall Street Journal” to publish this cartoon a couple of weeks ago, and this is where the conversation about the on-demand labor and personal services seems to be on these personal services and concerns about haves and have-nots. But it’s expanding further into the corporate market as well, through software provided by companies like Work Market, through companies like Universal Avenue that will provide you a sales force on demand, or HourlyNerd that will provide a management consultant with an MBA on demand.

And so there’s a whole bunch of policy issues that are raised in different industries by these different platforms. I’m not going to be touching upon the crowd funding issues today. I’m focusing more on consumer protection and labor issues that come up, largely from the platforms Airbnb, Etsy, and these wide variety of services.

And so as we transition from an economy that seems to be largely driven by institutions providing services to individuals to an economy where there are communities of different kinds, largely market-based and peer-to-peer, but also other forms of sharing communities that are giving us the things that we need, like these consumption goods, the first question that comes to mind is, How sustainable is this? This particular round of platforms has largely been created by the consumerization of digital. We’ve got these powerful GPS-enabled, high speed network-enabled computers that we carry around and they’re letting us sort of re-engineer the way that we consume and get services and borrow.

But there’s the sort of ongoing digitization of the physical as well, where maybe in the distant future autonomous cars—your Uber driver will no longer be a driver. But in the interim, the stuff that we own sort of knows where it is and can tell us how much it’s being used. And so as blockchain technologies lower the transaction costs and allow us to create marketplaces where a profit-maximizing platform may not have gone in because there’s not enough profit potential, this dramatically expands the scope of both peer-to-peer services and of peer-to-peer rental.

There’s a set of socioeconomic drivers that seem to be behind this trend as well. People like a lower ecological footprint. Densely populated urban areas favor this kind of peer-to-peer service. And we seem to have evolved to a point where we are willing to trust semi-anonymous peers based on some combination of trust signals—like maybe a digitized government ID, some information about their Facebook profile, feedback from other people, perhaps a mobile number. And so this combination of digital signals has gotten to the point where we are going beyond the eBay-like, you know, “I trust this person to send me a package,” and we’re moving to much more high stakes interactions where we are willing to say, “I’m going to get into a stranger’s car and be driven to another city.”

My favorite example of the digitization of trust—and also one that sort of frames the policy issues to come—is Blablacar, which recently acquired a wide variety of players in Europe, including Carpooling, which was its largest competitor. Blablacar facilitates the selling of empty seats in cars that are going from one city to another. And this illustrates some of the traffic flow on that network—this is from a couple of years ago. These are all people traveling from one city to another in Germany using the spare capacity in existing cars. And, you know, it really amazes me that at this point the Blablacar network carries more people every day than Amtrak does, and they’ve done it without any new investment in steel and concrete, creating this kind of invisible infrastructure powered by this digital trust.

What they also highlight—and to me, at the center of a lot of the policy issues, both on consumer protection and on labor, in this emerging sector of the economy—is the blurring of lines between personal and professional in the provision of for-money or commercial services. The idea of lending your apartment to someone or giving someone a ride from the airport, or preparing someone a meal or lending someone money for them to be able to start their own business: these are not new ideas, but they were largely in the personal realm. On the commercial side you had taxi drivers, people who ran bed and breakfasts, people who ran restaurants and banks that lent you money.

So what the sharing economy, the on-demand economy, has done is that it’s blurred the lines between personal and professional, leading to issues of like, you know, How do we protect consumers when their provider is not a professional certified driver? How do we count the jobs that are being created? Are we entering an economy where people are assembling work as piecework rather than having stable full-time jobs?

I want to spend the rest of my time highlighting what I think are some of the important policy issues raised by this emerging sharing economy. The first observation is that there are a wide variety of new self-regulatory opportunities that are created because you now have a platform that is mediating what used to be a peer-to-peer service without any sort of third party. So in the past, if you took a taxi, you needed the government in between in order to provide some sort of safety. Otherwise, people wouldn’t get into a taxi. Now you have a platform in between. And it’s not just the platforms. There are other third-party entities that have emerged that have existed for a long time—like homeowner associations, that are emerging, like worker unions for sharing economy providers.

And so it’s always been my position that when thinking about a new regulatory framework for these different exchanges of goods and services, that we have to think beyond the government, and think about whether there are self-regulatory—which doesn’t mean no regulation, it doesn’t mean de-regulation. It just means the regulation is executed, and perhaps even conceived by an entity other than the government.

A few months ago I published a paper in the “University of Chicago Law Review” that took a look at the history of self-regulation and what opportunities it provides for the sharing economy, and I distinguished between two kinds of self-regulation. I mean there’s one where, you know, there are information failures. You don’t know the quality of your provider. You don’t know the quality of the space that you’re going to be staying in. You don’t know if they person you’re lending to has been vetted. The platforms seem extremely well-equipped to take on a large fraction of the regulatory responsibility that used to need the government for these kinds of information failures: adverse selection, where the market fails because you’re not clear about quality, model hazard, where you worry about someone who borrows your thing treating it in a way that isn’t consistent with what they agreed to. Platforms are good for this kind of self-regulatory approach.

On the other hand, there’s a wide variety of old and new externalities that are also created. For instance, we’ve always been worried about congestion caused by too many cars on the road, too many taxis on the road. There are new externalities—like your neighbors might be upset if you host on Airbnb and your guests are throwing parties and there are strangers walking around the building. So for some of these externalities, it seems like—for example, for the Airbnb externality, it seems likely that a good part forward is to not involve the government, city, or state, perhaps not involve the platform, but to delegate this responsibility to the homeowner association, where the externalities are in fact localized and where buildings can make a choice, like, you know, Airbnb-free versus Airbnb-friendly.

Now turning to the labor side of the policy issues, there are two narratives playing out now when people talk about sort of the unbundling of employment and the creation of these on-demand services. One is the narrative of the empowered entrepreneur, where people were stuck in these jobs that they didn’t like and now are free to pursue their dreams. These platforms are gateways to entrepreneurship. They’re like finishing school for entrepreneurs, since universities don’t teach you how to start a company. You can sort of dip your toes in the water and get a sense for merchandising, pricing, running a small business. So that’s one narrative.

The other narrative is the race to the bottom narrative, where there’s a worry that somehow wages will be depressed, people won’t have income stability, the middle-class will be hollowed out, and we’ll be left with a society with a few million haves and hundreds of millions of have-nots.

Now, of course, both these narratives are right—and the question really is to what extent is each going to play out in different sectors and what are the policy actions we can take to move this in the direction that we want to. So I’ve been doing a lot of research on this front. I’ve found, for example, that TaskRabbit wage rates on average are far higher than the BLS wage rates for those categories in the geographies that they’re operating. I’ve found that providers tend to be far more entrepreneurial than the average member of the US population, which suggests more selection of entrepreneurs into this economy.

I built an economic model and did an extensive study projecting what happens when peer-to-peer rental markets go mainstream—and one of my findings, calibrating it to the automobile industry, was that there were welfare gains that were captured disproportionately by people below median income. Why? Because these are the people who were excluded because the barrier to ownership was too high. These are the people who will switch from owning to renting because the costs of carrying a car, for example, are too high and they would rather rent when they need it. And these are the set of people who will buy better cars in order to rent them out on the peer-to-peer market because they can then use the extra income to afford a higher car payment or a higher home payment.

Okay, so I’m going to conclude with three key policy issues around labor. One is that as we unbundle employment, we need new categorizations for employment. We’ve got independent contractors on one side and we’ve got full-time employees on the other side, and there is this belief that somehow full-time employment is the desired outcome. That is not going to be realistic in the economy of the future, so we need a more fine-grained categorization of employment so that we don’t have these two extremes. And platforms are hesitating to offer benefits to one extreme for the fear that perhaps they will then be categorized in the other extreme.

We need to count employment better, because work is not going to be measured as whole jobs—but is instead going to be measured in terms of output. And so unemployment statistics are no longer capturing the health of employment in the economy.

And we’re going to, perhaps, over the next few years see the emergence of worker cooperatives that start to subsume some of the privately-owned platforms. And if you think about Thomas Piketty’s book from last year where he demonstrates to us that the true driver of inequality in the economy is the fact that owned capital grows faster than the economy on average, while wages only grow at the pace of the economy, that if we start to increase the fraction of the economy that are owners of what they produce, of productive capital, then we might end up in an economy where there is less inequality.

And finally, in the United States, the social safety net is largely predicated on full-time employment with a large institution. You know, it’s really imperative—and I’ve seen efforts from Capitol Hill and elsewhere to start to address this problem, but it’s really imperative that we create a new social safety net where things like income stability, paid vacations, workers compensation, long-term disability—all of these things that are bundled with employment now are somehow freed from it and available to people who participate in the on-demand economy.