Regulatory Attacks on Airbnb Harm Efficiency and Equality

Airbnb and other companies in home sharing not only boost efficiency but also help increase material equality. On the supply side, they allow people of modest means to rent out their most valuable asset — their home. On the demand side, they allow people to stay in places they could not otherwise have afforded. Sadly, Airbnb is a frequent target of legislation ostensibly designed to protect third parties, but often focused on protecting the hotel industry.

And much of the legislation against homes sharing has come in cities like San Francisco and New York, which are dominated by cooperatives, condominiums, and rental apartments. In those cities the government legislation restricting Airbnb because of potential disturbance to neighbors is even less justified than in other places because the neighbors most likely to be disturbed by short-term rentals can use co-op, condominium and rental rules to prevent that activity in their buildings. Private ordering at the building level is much more likely to accurately gauge the costs and benefits of permitting short term rentals than is municipal legislation, because hotel owners will not have as much influence in shaping the rules established by individual buildings.

Indeed, the sharing economy naturally creates markets to address these conflicts, mediating between the different stakeholders in an apartment building and make short-term rentals easier and less disruptive. Pillow Residential, for instance, provides contracts with building management and renters to permit short-term subleases. These agreements specify the number of nights available for rentals and provide mechanisms for monitoring compliance with rules. Both management and owners get part of the revenue earned through such rentals. This is another example of how the sharing economy can solve the problem of agency costs.

Another justification for legislation restricting Airbnb and similar companies is that those rentals raise the costs of housing for local residents in by bidding up the price of housing. Analyzing the effects of the Airbnb on housing requires distinguishing between those that restrict the operation of owner occupied homes and larger commercial enterprises. Both use sites like Airbnb, but it is owner occupied homes that do more equality for those owning a home, although both may contribute to equality for travelers by reducing prices for short-term rentals in high priced locations.

The supply of owner occupied housing is not likely to be available but for services like Airbnb. Thus, not surprisingly, the empirical work that has been done suggests that permitting owner-occupied housing to list rental space for short term has relatively little effect on home prices. Moreover, in a well-functioning market the opportunity for short term rentals should actually lower the effective cost of housing for those renting out their home on occasion. The financially constrained can now can use their property to take in short-term renters on occasion, defraying their housing expense.

Researchers have suggested that easier access to listing commercial housing on Airbnb does drive up the price of housing in the short run, no doubt because owners can get more money for some properties by short-term rentals than by longer term ones. But by giving owners the opportunity to switch from long-term rentals to short-term rentals depending on circumstances, it will provide developers with greater incentives to build new housing, which will increase in the long run the supply of housing in a given area.

It is true that existing zoning laws may prove to be an obstacle to building more housing units in the long run. But in that case, an approach more consistent with promoting equality is not to restrict Airbnb but instead to relax existing zoning laws.

And all these anti-Airbnb regulations ignore the advantages of permitting easier short-term rentals by those who want to visit rather than live in a jurisdiction. Increasing the ability to travel widely and affordably is one of the best ways to equalize the life experiences of the rich and the rest of society.

Airbnb is testimony to the power of private markets to reduce agency costs. Unfortunately, political markets still have very high agency costs. Hence the many bad regulatory attacks on an efficient and equalizing innovation.

Reader Discussion

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on March 14, 2018 at 15:27:39 pm

I don’t understand McGinnis’s claim that regulating Airbnb harms equality. McGinnis argues that Airbnb drives down certain costs for travelers. But presumably it drives down these costs for rich and poor alike. Yes, Airbnb permits poor people to rent out their homes. But it permits rich people to do so, too. Thus, the equality argument seems kind of attenuated.

McGinnis argues that the idea of regulating residential space provided by Airbnb is being pushed by “the hotel industry.” Curious how, under other circumstances, McGinnis is so solicitous of the idea that corporations are people and we should respect their rights as we would anyone else’s rights.

I’m not thrilled with the idea that government has a duty to respect a corporation’s religion. But I do believe that corporations should be entitled to protection of the laws that are equal to those enjoyed by similarly-situated people. And, as a first order approximation, I’d say that hotel owners and Airbnb providers are similarly situated in the short-term housing business. Thus I’d expect an advocate for equality to argue for parity in the regulations that apply to each.

That doesn’t necessarily mean that Airbnb should have to endure stiffer regulation; maybe hotel regulations should be relaxed instead. But either way, this would be a true message of equality.

The choice to regulate hotels strictly in an era with relatively less competition, but to relax the regulation in an environment of greater competition, is perfectly rational. We’ve observed a similar pattern regarding local and long-distance phone service, and in securities regulation (permitting light regulation of Kickstarter campaigns). Especially in an environment with nigh perfect access to information (e.g., searchable online reviews), the rise of more efficient market forces can render older regulatory regimes unnecessary.

(In closing, I’ll again mention my concern for parties that relied to their detriment on an apparent government promise to limit competitive entry—as with monopoly service areas for utilities, or medallions for taxis, or certificate-of-need proceedings for medical facilities. A government choice today to uniformly relax regulation will do little to help a party who, yesterday, committed capital in reliance of the government’s regulatory scheme. But I don’t see how that concern applies to the Airbnb debate.)

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on March 14, 2018 at 15:44:00 pm

Hey nobody - here is a surprise - I AGREE WITH YOU WHOLEHEARTEDLY!

McGinnis in his paean to competition fails to recognize the effects of prior government regulation on the other provider of "short-term" housing, i.e. hotels. Additionally, he fails to note that the hotel industry is a favorite target for municipal taxation with all manner of "targeted' taxes being levied upon the offering of hotel accommodations. When a new sports complex is contemplated, an urban renewal project etc, the answer almost invariably is to levy an additional hotel tax (as well as car rental taxes). Heck, one would be better off to hitchhike from the airport and find shelter in one of the municipalities assorted homeless shelters - a lot cheaper and you usually get free food (and it is not taxed).

Join me for a glass of Mad Dog, good sir!

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Image of gabe
on March 16, 2018 at 13:44:40 pm

I live in a resort city, Palm Desert, CA, and we have had an explosion of short term rentals in the city and the entire valley in the last five years. We have about 1200 licensed units in our city and an estimated 1800 others that are not licensed. A minority of these are actually home-sharing operations. Only about 25% of the licensed units are operated by a resident home owner. The rest are owned by investors from Los Angeles, Portland, OR, the Seattle area, and a number of Canadians. One woman in Vancouver, an attorney, owns six houses here and they are worth an estimated $6 million.

I live in a nice, residential neighborhood of the city and we have about 250 STRS in the area. I have, within a ten minutes walk from my house, 24 licensed rental properties. None of them have the owner present. The houses have a total of 80 bedrooms to rent but some of the owners add bedrooms without permits and advertise they sleep 12 or 16 people when six or eight is the legal limit. This is a distributed boutique hotel in a part of the city zones residential that does not allow business.

These properties are not homes, they are hotels but they are not inspected by the city for fire and safety matters. They are not ADA compliant. They are speculative investments and some of them are renting for thousands of dollars for the weekend. When the Indian Wells tennis tournament is going on or the Coachella Valley music festival is happening, some homes here rent for $15,000 for three days. z Some people rent the house for $50,000 for the month and sublet weekends for $25,000.

The biggest problem for me is not the money being made, but the noise generated by weekend guests who come here to party for three days and go away. There are so many party houses in South Palm Desert that the people who live here began to complain en masse to the city for not managing the problem of noise and unlicensed rental properties. The city, after months of study & hearings, passed a new ordinance to no longer permit STRs in R-1 & R-2 zones. The existing licensed units have until Dec. 29, 2019 to decide what to do next. The owners may continue to operate as an STR if they are present in the home. The can rent it, as was the case for years, on a monthly basis, or they can sell the property.

The fact that we have over 1200 houses now being used as short term rentals has driven up housing costs since the inventory is way down. It made renting a home prohibitively expensive for people who want to live here but are not ready to buy yet. Monthly rentals three years ago were about $3000. Today the median rental is $5500 per month.

This article does not deal with the market effects of STRs and it completely ignores the quality of life issue brought to a city by weekend party houses. I assume Mr. McGinnis does not live next door to a fraternity house or in the French Quarter. That is what has happened on several streets in Palm Desert.

It is far worse in Palm Springs. One elderly lady lives on a street where her house is the only one of ten that is not a short term rental property.. The gated communities in Palm Springs and Palm Desert don't allow STRs so the wealthy don't have to tolerate the noise, trash, 911 calls, and other disturbances that Airbnb has brought to many cities around the world. The real inequality is gated with private, armed security forces.

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John A Curran

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