We currently are in the Wild West of “sharing.” Many people hate that term but I actually think it is useful. I would define the “Sharing Economy” as follows:
1. Individuals own key assets — cars, dwellings, their time etc.
2. There exists a market platform to match those individuals with consumers that satisfies the key market design criteria (a la Al Roth) of liquidity, temporal agglomeration and safety.
1 hasn’t changed but 2 has largely as a result of mobile technologies. Not because these technologies were required for customers necessarily but because they were great in overcoming the temporal agglomeration issues for suppliers; i.e., a supplier could signal their availability and location in real time.
As it turns out, the first criteria — ownership — is becoming a big issue in regulatory circles. Last week, in California, an Uber driver was found not to be an independent contractor but something closer to an employee. Employees have rights that contractors do not and, importantly, if such rulings spread, the first criteria is at peril but it may also undermine the flexibility by which suppliers could operate in these markets.
In short, these developments benefit those workers who are willing and able to turn their spare time to productive uses. These workers tend to be self-starters and people who are good at shifting roles quickly. Think of them as disciplined and ambitious task switchers. That describes a lot of people, but of course, it isn’t everybody.
This is true of many situations and, normally, economists do not apply a strict Pareto criterion to evaluate them. When it comes to work in general, because people are paid to work with money, we make the converse assumption that for any losses from a change there exists a monetary compensation mechanism that can make the potential losers at least no worse off from the change.
There is plenty of reason to believe that there is potential for compensation to eliminate opposition in the sharing economy. The reason is simple: competition creates more value than monopoly and, absent compensation, that additional value resides with new competitors and, most critically, consumers.
The problem is that economists have been notoriously unable to deploy compensation mechanisms as a means of facilitating change. There are exceptions. For instance, in the early 1980s, the Australian government negotiated a wage-tax trade-off with trade unions to rid that economy of a decades-long wage-price spiral. But usually we are stuck lamenting an inability to move forward.
This issue lies at the heart of the sharing economy. The notion that we should allow these new services is obvious: they are good things as competition and innovation are good things. When we dress them up in regulatory arguments over safety etc, while these need to be worked out, they aren’t that hard to work out. Apply standards consistently but allow entry and competition.
Instead, the real barrier to change is compensation. Owners of taxi licenses paid sizeable sums for them at the behest of local governments. Also, those governments’ benefit from the sale of such licenses. And when those governments get to decide the rules, it doesn’t take a genius to wonder why change is hard.
Emilio Calvano suggested in Italy that we move from a situation of issuing licenses to a tax on those conducting ride sharing services. The tax revenue could then be used to finance the buy-back of existing licenses.
This is a start but I think that we will need to think even more out of the box to find compensation mechanisms. Here are some suggestions of others to consider:
1. Non-license taxes: suppose that we have a two tier system. You can purchase a taxi license and operate free of other constraint (or just with a cap on prices) or you can agree to pay a per mile charge (when you are actually sharing rides) but otherwise be free of non-safety regulations. This would allow existing taxis to earn money as a full time job while taxing the peak demand times to provide additional revenue to local governments from the loss in value of future licenses.
2. Radical future: the future with ride sharing is that we get rid of car ownership as the norm. In this situation, I wonder whether all cars should be licensed (a la Singapore) to encourage their use either as full time taxis or for ride sharing.
This is going to take some time but I think we economists need to get more serious of coming up with compensation mechanisms that can move things forward.