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.