Blanket, categorical rules can be both inefficient and self-defeating, as decision-makers lack the knowledge to understand their secondary consequences.
In the sharing economy, companies like Uber, Lyft, and Airbnb, add value by using resources that would otherwise be idle. The Internet connects people who need transportation or accommodations with people who are willing to provide them. Another substantial advantage is that these same connections permit social norms rather than government regulation to enforce standards of good conduct.
Government has a model for regulating taxis. It generally requires substantial licensing and enforces rules by tracking complaints and disciplining drivers found in violation. But a company like Uber makes much of this regulation unnecessary. First, given its substantial capital investment, it has every interest in checking out drivers itself before it permits them to represent its good name.
But Uber also makes use of social media to assure continuing good behavior of its drivers. As Ted Ullyot noted last night at a conference of the Federalist Society, customers who receive bad service do not have to complain to the taxi commission. Instead, they can give the driver a bad rating. And bad ratings mean that the driver will not be driving for Uber for long, and thus the ratings provide incentives to be honest and pleasant. There is a similar process for Airbnb and Lyft.
Uber now also permits drivers to evaluate their customers. And this kind of rating will prevent customers from behaving abusively to drivers, at least if they want to continue to enjoy the convenience of Uber.
These companies show how modern information technology helps private ordering substitute for government. Expanding networks of information should ultimately prove more effective than the government in reducing commercial fraud. Fraud is an inevitable problem of human society, because the tendency to deceive is innate in man. Deception in human society decreases its overall wealth because individuals will less readily invest in the cooperation that creates wealth insofar as deception is prevalent. Social mechanisms can restrain deception and enforce promises. Some social mechanisms depend on formal, centralized authority, but others are less formal, depending more strongly on decentralized norms. The efficacy of centralized versus decentralized mechanisms is influenced by the costs of various activities, including the cost of exiting the community and the cost of disseminating information.
For example, in hunter-gatherer societies it was difficult to leave the community and still survive. Acts of deception were therefore generally more costly to the deceiver than in the more mobile and anonymous societies that have characterized the West in the last millennium. These societies have had to rely more on centralized enforcement mechanisms until relatively recently. As the cost of collecting and transmitting information has declined, other arrangements have become more cost-effective. For instance, when information costs were high, debtor prisons may have been necessary to enforce obligations. With lower information costs, much of the discipline in personal credit markets is imposed by information circulated by credit agencies.
Today, as information costs fall still further, one can accumulate a broader array of data on people’s past actions. The greater ease in evaluating people’s integrity should deter deception across a wide range of activities. The sharing economy has the great advantage of encouraging good behavior even as it limits the need for the heavy hand of government.