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Room for Compromise: A Logical Approach to Regulating Airbnb
By Adam Weber and Ariel Burde
Duke University
April 2016
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Executive Summary
The newly created sharing economy has revolutionized the way individuals utilize
resources. Since its founding in 2008, Airbnb, a web-based service that connects travelers and
hosts, has given individuals the opportunity to rent out their homes on a short-term basis.
Despite its rapid growth and wide appeal, Airbnb’s unique business model has raised challenging
questions on how to regulate the home-sharing industry. This paper focuses on two important
issues – the effect of Airbnb’s short-term rentals on housing supply and the safety and insurance
ramifications of Airbnb’s operations – and proposes practical regulatory solutions that
adequately address these considerations without compromising Airbnb’s innovative and unique
business model.
In the forthcoming case study, we begin by introducing the sharing economy, outlining
its history, its basic elements, and its major players. We then introduce Airbnb, its history, its
business model, and its key competitors. Next, we discuss the challenges in regulating the
sharing economy, providing some legal and historical context. We go on to describe the long
regulatory battle between Airbnb and New York State officials. These regulatory proceedings
largely inform our ultimate conclusions and policy recommendations. Moving on to our
recommendations, we first outline the key stakeholders involved in Airbnb’s business model.
Finally, we explore two important issues in need of a more comprehensive regulatory scheme
and propose policies to address the risk they pose, while preserving the benefits Airbnb delivers.
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Introduction to the Sharing Economy
The sharing economy is a system built around the sharing of human and physical
resources. It is made up of web-based peer-to-peer marketplaces. And the internet, further
revolutionized the sharing economy. Communities have shared assets for thousands of years, but
the full extent of the sharing economy did not surface until the age of the Internet. The Internet
reduced transaction costs, which allow for facilitated transmission of information between
parties.1 According to research complied from professors at Princeton University, University of
California, Berkeley, the sharing economy has created people with more opportunities to earn
money in addition to a full-time or part-time job.2 As of 2015, 44 percent of US consumers were
familiar with the sharing economy and 19 percent of the total US adult population engaged in a
sharing economy transaction. The breakdown of the percentage is shown in Figure 1.3
1 Edelman, Benjamin G. and Geradin, Damien, Efficiencies and Regulatory Shortcuts: How Should We Regulate Companies like Airbnb and Uber? (November 24, 2015). Forthcoming, Stanford Technology Law Review. Web. 8 Feb. 2016.2 “Uber, Airbnb and consequences of the sharing economy: Research roundup - Journalist's Resource.” Journalists Resource (2015). Accessed April 21, 2016. http://journalistsresource.org/studies/economics/business/airbnb-lyft-uber-bike-share-sharing-economy-research-roundup3 PwC. “The Sharing Economy – Consumer Intelligence Series.” Last modified 2015. https://www.pwc.com/us/en/technology/publications/assets/pwc-consumer-intelligence-series-the-sharing-economy.pdf, 8.
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Figure 1
The Internet coupled with new technology and operations defines the sharing economy,
however, the sharing economy also stands on core pillars. The core pillars of the sharing
economy illustrate its benefits.4 These pillars include: digital platforms connecting capacity and
demand; transactions offering access over ownership; collaborative forms of consumption;
branded experiences driving emotional connection; and understanding an economy built on
trust.5 While some of the pillars are not unique to the sharing economy, the pillars allow for the
sharing of more assets. First, platforms that connect capacity and demand by hosting sharing
economy business models. Digital platforms measure available market capacity and connect that
capacity with those who need it.6 For example, Airbnb matches spare rooms and apartments with
travelers in need of lodging.7 Second, transactions offer access instead of ownership. The access
includes renting, lending, subscribing, reselling, swapping, and donating.8 Third, collaborative
forms of consumption. These transactions involve deeper forms of social interactions.9 For
4 Ibid., 15.5 Ibid., 15. 6 Ibid., 15. 7 Ibid., 15. 8 Ibid., 15. 9 Ibid., 15.
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example, Airbnb and Couchsurfing provide travelers with the ability to connect with hosts and
receive personalized travel tips. For lower prices, one can get similar services from luxury hotels
without the high cost of personalization inherent in the traditional economy.10 Fourth, branded
experiences drive emotional connection to the middleman. Companies need to manage links and
social connections for successful marketing.11 Fifth, the economy is built on trust and
understanding. About one-fifth of American consumers participate in the sharing economy. In
general, 64% of consumers believe government regulation is less important than peer regulation
in the sharing economy.12 The combination of digital platforms connecting capacity and demand;
transactions offering access over ownership; collaborative forms of consumption; branded
experiences driving emotional connection; and understanding an economy built on trust
differentiate the sharing economy from the nondescript trading and bartering that eventually
morphed into today’s sharing economy. These pillars create a strong basis for the sharing
economy to exist and grow. Because the sharing economy holds the basis of each of these pillars,
it significantly impacts local, national, and international economies as well.
The sharing economy has emerged as an additional supplier of goods and services to
those already on the market.13 As the size of the sharing economy grows, so does the magnitude
of its economic impacts. Already established businesses are forced to enter the sharing economy
in some way to keep up with the society.14 The sharing economy supplies the outlet for
10 Ibid., 15. 11 Ibid., 15. 12 Ibid., 16. 13 Georgios Zervas, Davide Proserpio, and John Byers. "The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry "Boston U. School of Management Research Paper (2013-16) : 2. http://people.bu.edu/zg/publications/airbnb.pdf 14 Kurt Matzler, Viktoria Veider, and Wolfgang Kathan. "Adapting to the Sharing Economy." MIT Sloan Management Review 56, no. 2 (Winter, 2015): 71-77. http://proxy.lib.duke.edu/login?url=http://search.proquest.com/docview/1650910724?accountid=10598.
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established companies to recognize and support their customers’ desire to resell products.15 This
part of the sharing economy describes e-bay or amazon marketplace, however, Airbnb and Uber,
for example, deal with a more evolved sharing economy. Airbnb and Uber sell services; they do
not focus on the reselling of products. Indeed, the sharing economy is gaining support and
fundamentally altering how people own and consume property, goods, and services.16 Network
technologies, social and collaborative software, and consumers changing habits all aid the
growth of the sharing economy. While the shift toward more sustainable modes of consumption
represents a major threat to a number of established business models and revenue streams, it also
offers several pathways where companies can benefit.17 Assisting people in their attempt to share
does not necessarily mean they will not buy your products. As Patagonia and Ikea have
demonstrated, providing support for sharing enhances not only company support but also its
status.18 Ultimately, the sharing economy creates a more efficient use of physical assets in an
evolving form of commerce. The sharing economy takes the philosophies of eBay and craigslist
a step further. Participants do not relinquish ownership rather they share it.
Overview of Airbnb
Airbnb was founded in August 2008, headquartered in San Francisco, CA, and is
privately owned by Brian Chesky, Joe Gebbia, Nathan Blecharczyk, and Laurence Tosi. It is a
website for people to list, find, and rent lodging. It has over 1,500,000 listings in 34,000 cities
and 190 countries.19 Since then it has served over 30 million guests. Such platforms disrupt
15 Ibid., 71-77. 16 Ibid., 71-77.17 Ibid., 72.
18 Ibid., 73.19 “Welcome Home,” Winter 2016 https://www.airbnb.com/.
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traditional hospitality industries by creating new sources of supply.20 Airbnb’s business model
includes minimal regulatory controls in most locations where hosts and guests both have to build
trust to maximize the likelihood of a successful booking.21 Airbnb has changed the traditional
market for tourism by providing an online marketplace that permits large-scale rental of spaces
from one ordinary person to another. With this peer-to-peer interaction, the Airbnb website
secures its customers identity by ensuring that all members provide photo identification,
authentic phone numbers, and links to Facebook and LinkedIn accounts.22 With its easy access
website, Airbnb is changing the travel economy around the world. A basic over view of how
Airbnb began follows in Figure 2.23
20 Yeung, Ken, 2014 “With 8.5m guests, Airbnb seeks to build a more uniform customer experience via its Hospitality Lab,” The Next Web: http://thenextweb.com/insider/2013/09/17/with-8-5m-guests-airbnb-seeks-to-build-a-more-uniform-customer-experience-with-its-hospitality-lab/. 21 Sangeet Paul Choudary, 2013 “The Airbnb Advantage,” The Next Web: http://thenextweb.com/insider/2013/03/10/the-airbnb-advantage-how-to-avoid-competition-and-become-a-multi-billion-dollar-startup/.22 Molly Cohen, Arun Sundararajan. "Self-Regulation and Innovation in the Peer-to-Peer Sharing Economy." University of Chicago Law Review Dialogue 82 (2015): 121 https://lawreview.uchicago.edu/sites/lawreview.uchicago.edu/files/uploads/Dialogue/Sundararajan_Cohen_Dialogue.pdf.23 Anna Vital, “How Airbnb Started,” April 10, 2014, https://burnersxxx.files.wordpress.com/2014/11/how-airbnb-started.png .
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Figure 2
Airbnb runs on a marketplace platform model where it connects hosts and travelers and
enables transactions without owning any rooms itself. Airbnb’s business model includes minimal
regulatory controls in most locations where hosts and guests both have to build trust to create a
successful booking. Airbnb’s reputation and revenues have rapidly grown since it was created.24
Much of its revenue comes from service fees from bookings. Depending on the size of the
reservation, guests are required to pay a six-twelve percent nonrefundable fee.25 A bigger
reservation has lower service fees for guests. With each booking, hosts are charged a 3 percent
fee to cover processing of guest payments.26 When booked, guests pay the service fee unless a
host cancels or retracts from the listing. Furthermore, depending on state or country laws,
customers may need to pay a value-added tax (VAT).27 A VAT is a tax assess on the final sale of
24 Trevir Nath, “How Airbnb Makes Money,” Investopedia, November 24, 2014,http://www.investopedia.com/articles/investing/112414/how-airbnb-makes-money.asp . 25 Ibid. 26 Ibid. 27 Ibid.
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goods and services. Airbnb guests in the European Union, Switzerland, Norway, Iceland, and
South Africa all have a VAT and service fees.28 Thus, Airbnb makes much of its revenue from
booking fees and from host and guest service taxes.
Airbnb exists in a highly popular economic sector: travel. Because traveling includes a
wide variety people for different reasons, Airbnb has competition from the hotel industry and
from startups similar to itself. Hotels, while regulated in alternative ways to Airbnb, hospitality
marks a defining trait of the hotel industry. According to A.K. Sandoval-Strausz in the book
Hotel, “Hotels were sophisticated hospitality machines.”29 They served the basic purposes as inns
and taverns by providing basic needs including food and shelter. Hospitality transformed with
the operation of hotels. As hospitality transformed the hotel industry, it relates the sharing
economy core pillars as they relate to Airbnb, specifically an emotional connection and trust.
With Airbnb, an emotional connection and foundation of trust between host and guest shapes a
guests’ experience whereas in the hotel industry, hospitality helps shape guests overall
experience. Hotels have a permanent state of coming and going with constant contact between
strangers and the need to establish and maintain contacts and relationships. In the hotel
transformation, they began to “[represent] a new paradigm for hospitality” 30 Host-guest
relationships became increasingly impersonal which was suited for a nation to become more
mobile. The growing impersonal connection between hotel guests and employees relates to the
purely mobile connection between Airbnb hosts and guests. Many Airbnb guests and hosts never
meet but are connection through Airbnb’s website and social media.31 Lastly, over decades, hotel
28 Ibid. 29 A.K. Sandoval-Strausz, “House of Strangers - The Transformation of Hospitality and the Everyday Life of the Hotel” in Hotel - An American History (New Haven: Yale University Press, 2007), 142.30 Ibid., 143.
31 “Host,” Winter 2016 https://www.airbnb.com/ host
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managers and workers devised elaborate methods for welcoming, accommodating, and serving
the masses of travelers and strangers who passed through and inhabited the nation’s cities. This
helped establish American urbanism developed by the constant movement of people, goods, and
information. While the hotel industry continues to develop as it redefines hospitality, Airbnb
averages almost 22 percent more guests per night than Hilton Worldwide.32 Regardless of
hospitality factors, Airbnb continues to grow and compete with the hotel industry.
Airbnb is present in 34,000 cities and in 190 counties. In fact, in eight major U.S. cities
Airbnb rates are significantly lower – sometimes the rates are as much as 80 dollars per night –
or comparable to hotels including Boston, Chicago, Los Angeles, New York, Portland, Seattle,
and Washington D.C. Indeed, Airbnb is also present in London, Sydney, Paris and Toronto.
While Airbnb has a large presence around the world, it has competitors with similar foundations
in the sharing economy. Other sharing economy members similar to Airbnb are: Homeaway,
Flipkey, Onfinestay, VRBO, and couchsurfing. Homaway is a vacation rental marketplace with
more than 1,000,000 vacation rental listings in 190 countries, and has 1588 employees. 33 It
operates through 40 websites in 22 languages.34 Flipkey is similar to Homeaway yet it is part of a
larger company, TripAdvisor. It deals with vacation rentals on Tripadvisor.com.35 Onefinestay,
although a start-up, tries to match the hospitality found in hotels with its home rentals. Guests
and hosts can become members of Onefinestay and list or rent homes in London, New York,
Paris, or Los Angeles.36 VRBO, however, is part of the HomeAway business, the world leader in
32 PwC. “The Sharing Economy – Consumer Intelligence Series.” Last modified 2015. https://www.pwc.com/us/en/technology/publications/assets/pwc-consumer-intelligence-series-the-sharing-economy.pdf, 14. 33 “HomeAway,” Winter 2016 https://www.homeaway.com/?k_clickid=9c00d753-ef43-433b-bd55-5ef042f669b1&gclid=CjwKEAjw_ci3BRDSvfjortr--DQSJADU8f2jrQyjFYJY1TFd5i0cZXPX8W3EIIlaqySj-bibWDtDARoCIlLw_wcB . 34 Ibid.35 “About FlipKey,” Winter 2016, https://www.flipkey.com/pages/about_us/.36 “FAQs,” Winter 2016, http://www.onefinestay.com/faq/ - 10.20 .
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vacation rentals with over 950,000 listings. It offers a large selection of properties for varying
budgets.37 Lastly, Couchsurfing is a website where provides a platform for members to “surf” on
couches by staying as a guest at a host’s home.38 Indeed, these competitors pose a threat to
Airbnb because it is not the only company in the sharing economy that provides the home rental
services. Airbnb is, however, the largest, most popular company to do so.
Airbnb runs in a highly competitive industry – vacation and home rentals. Because of
competition from hotels and other startups, Airbnb’s ratings are a critical part in accruing more
members and users. According to George Zervas, Davide Proserpio, and John W. Byers in “A
First Look at Online Reputation on Airbnb, Where Every Stay is Above Average”, the average
Airbnb property rating is about 4.7 stars on a scale from one to five where one is the lowest and
five is the highest.39 Additionally, Airbnb “[boasts]” that “94% of all properties” have “4.5 or 5
stars.”40 The paper then contrasts Airbnb’s rating to that of Trip Advisor. With Trip advisor’s
average rating of 3.8 stars. Zervas, Proserpio, and Byers come to the conclusion, however, that
Airbnb ratings are more inflated compared to TripAdvisor because either individual versus
individual rating or because Airbnb stays can be compared to vacation rental stays.41 The
following chart in Figure 3 examines this comparison. 42
37 “VRBO – Part of the HomeAway Family,” Winter 2016 https://www.vrbo.com/ . 38 “Getting Started,” Winter 2016 http://www.couchsurfing.com/about/how-it-works/ .
39Georgios Zervas, Davide Proserpio, and John Byers, "A First Look at Online Reputation on Airbnb, Where Every Stay is Above Average,” Boston U. School of Management and Computer Science Department Research Paper (2013-16) : 3.40 Ibid., 3.41 Ibid., 3.42 Ibid., 15.
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Figure 3: Distribution of property ratings on Airbnb and TripAdvisor. The dotted lines show the distribution means.
Furthermore, this discrepancy in the ratings between the two companies is evident in multiple
United States cities as shown in below in Figure 4. 43
Figure 4: Distribution of Airbnb and TripAdvisor property ratings by US market
While Airbnb gives an assimilated total property rating, individual ratings are only available on
profiles, thus Airbnb does not report an overall average.44 This makes it difficult for hosts to see 43 Ibid., 17.44 Ibid., 5.
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what kind of guest they may be allowing into their home. The elusive individual ratings draw the
success of the individual ratings a question. This is because Airbnb “boasts” their high property
rating thus the deliberate move in not making a big deal about individual ratings. Airbnb, as a
company, makes it difficult to acquire bad or harmful ratings. Given the short time to give a
rating before the option disappear Airbnb is able to control is customers and hosts. First, if a
customer has a bad experience then they may not not want to immediately report it. This
decision, however, blocks them out from making any type of criticism since Airbnb removes the
rating option after a certain amount of days. Inferring the questionable individual ratings also
stems from multiple posts on Trustpilot about Airbnb’s poor customer service.45 Guests rating
Airbnb as a one star business used words such as “fraudulent host,” “avoid if possible,” and
“incompetent company” to describe their disapproval of the company due to its customer
service.46 While Trustpilot is an opinioned blogsite, people planning trips and vacations do read
it and bad ratings can have significant influence on future rental choices.
Challenges in Regulating the Sharing Economy
In November 2012, Nigel Warren, a resident of the East Village neighborhood of New
York City rented out his apartment for three nights.47 His landlord was later notified of five
violations of illegal transient hotel laws resulting from Mr. Warren’s actions that approached
40,000 dollars in fines.48 Because Mr. Warren was not present during the guest’s stay and
accepted monetary compensation, he was found to be in violation of the Multiple Dwellings
45 “Airbnb Reviews,” Spring 2016, https://www.trustpilot.com/review/www.airbnb.com.46 Ibid.47 Lieber, Ron. 2012. “A Warning for Airbnb Hosts, Who May Be Breaking the Law.” The New York Times, Accessed March 27, 2016.http://www.nytimes.com/2012/12/01/your-money/a-warning-for-airbnb-hosts-who-may-be-breaking-the-law.html.48 Ibid.
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Law.49 Although Airbnb’s terms and conditions did inform hosts of their responsibility to follow
local rules and regulations, many users complained that the company was not explicit enough.50
Six months after receiving notice of his violation, Mr. Warren, with the help of Airbnb’s legal
team, proceeded to combat the government’s initial ruling, and succeeded in getting his fine
knocked down to 2,400 dollars.51 The Environmental Control Board found that because Mr.
Warren’s roommate was present during the time of the guest’s occupancy, he was not in
violation of the Multiple Dwellings Law.52 Airbnb followed up by including a more aggressive
statement in their terms and conditions regarding the responsibility of their hosts to understand
the legality of their actions.53
Despite Mr. Warren’s victory, the highly publicized case opened the floodgates for
complaints and legal maneuvers against Airbnb’s operations. New York Attorney General Eric
Schneiderman announced that his office would look for a path around the protective clause of
Section 230, which transferred the legal liability from Airbnb to their individual hosts.54 New
York State Senator Liz Krueger, who authored the Multiple Dwellings Law, claimed that many
Airbnb listings in New York, sending a clear warning to Airbnb and its users.55
49 Multiple Dwelling Law, Art. 1, §4.8(a)50 Lieber, Ron. 2012. “A Warning for Airbnb Hosts, Who May Be Breaking the Law.” The New York Times, Accessed March 27, 2016.http://www.nytimes.com/2012/12/01/your-money/a-warning-for-airbnb-hosts-who-may-be-breaking-the-law.html.51 Lieber, Ron. 2013. “A $2,400 Fine for an Airbnb Host.” The New York Times Bucks Blog. Accessed March 1, 2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.52 Brustein, Joshua. 2013. “Why Airbnb’s Legal Victory Isn’t the End of its Problems.” Bloomberg. Accessed March 1, 2016. http://www.bloomberg.com/news/articles/2013-10-01/why-airbnbs-legal-victory-isnt-the-end-of-its-problems-in-new-york 53 Lieber, Ron. 2013. “A $2,400 Fine for an Airbnb Host.” The New York Times Bucks Blog. Accessed March 1, 2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.54 Fickenscher, Lisa. 2013. “Hotels Girding for a Fight against Airbnb.”Crain’s New York Business. Accessed March 6, 2016. http://www.crainsnewyork.com/article/20130819/HOSPITALITY_TOURISM/130819909/hotels-girding-for-a-fight-against-airbnb.55 Brustein, Joshua. 2013. “Why Airbnb’s Legal Victory Isn’t the End of its Problems.” Bloomberg. Accessed March 1, 2016. http://www.bloomberg.com/news/articles/2013-10-01/why-airbnbs-legal-victory-isnt-the-end-of-its-problems-in-new-york
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The rapid growth of the sharing economy has transformed the way individuals utilize
resources, leading to substantial efficiency gains. Through the services provided by disruptive
companies like Airbnb, Uber, and others, consumers can now make fuller use of their most
expensive resources, like homes or automobiles. The decentralized structure of the sharing
economy has drastically lowered barriers to entry in previously highly guarded industries, such
as the hospitality and transportation industry. Individuals seeking new ways to earn money can
easily become suppliers on these sharing services by offering up their resources on a temporary
basis.56 Consumers also benefit from the increased supply of these resources through lower
prices.
The unprecedented business model employed by companies like Airbnb, Uber, and
TaskRabbit, and other shared-services companies, has raised serious challenges for regulators.
Many of the laws regulators have been attempting to apply to sharing economy companies were
written by lawmakers who did not foresee the development of this new type of industry. Prior to
the rise of the sharing economy, regulations were divided into two clear-cut categories: those
intended for individual citizens and those intended for businesses. The sharing economy has
created a third category: “people as businesses.”57 Furthermore, because many of the industries
prone to disruption by the sharing economy are regulated on a state or local level, a uniform
framework has yet to be established. Rather, different states and localities are experimenting
with different approaches.
This decentralized regulatory approach has resulted in varying ideas on where the line
between consumer choice and consumer protection should be. The sharing economy has
56 Geron, Tomio. “Airbnb And The Unstoppable Rise Of The Share Economy.” 2013. Forbes. Accessed March 6.http://www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/.57 Kaplan, Roberta, and Michael Nadler. "Airbnb: A Case Study in Occupancy Regulation and Taxation." University of Chicago Law Review 82, no. 103 (2015): 103-15. Accessed March 27, 2016. Hein Online.
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benefitted consumers with expanded choice and lower prices. However, the unregulated nature
of the industry poses public safety threats. The weight that lawmakers grant to each of these
factors should determine the extent of the regulation imposed on the sharing economy. Of
course, one cannot ignore the powerful voices of the special interest groups occupying the
position of the incumbents in the industries that sharing economy companies threaten to
disrupt.58 This presents another important challenge regulators must overcome in devising an
effective set of supervisory policies.
While most sharing economy regulation is enforced on the state and local level,
developing Internet-based “peer-to-peer” companies have relied on an important federal statute
to circumvent prohibitive state regulations. Section 230 of the Telecommunications Act
(“Section 230”) offers Internet based companies legal protection from the posts of their users.
The law states, “No provider of user of an interactive computer service shall be treated as the
publisher of speaker of any information provided by another information content provider.” That
is, sharing economy website like Airbnb and Uber that consist of user posts cannot be prosecuted
for content that violates a state law, because the company did not directly publish that content.59
Section 230 does provide an exemption for federal criminal law violations, under which the
companies would be liable.60
Section 230 was enacted in 1996, when the digital revolution was still in its earliest
stages of development. The law served as a crucial source of protection for the earliest Internet
companies seeking to disrupt traditional marketplaces. Since the law’s adoption, companies like
58 Fickenscher, Lisa. 2013. “Hotels Girding for a Fight against Airbnb.”Crain’s New York Business. Accessed March 6, 2016. http://www.crainsnewyork.com/article/20130819/HOSPITALITY_TOURISM/130819909/hotels-girding-for-a-fight-against-airbnb. 59 47 U.S. Code §230 Protection for Private Blocking and Screening of Offensive Material60 Goldman, Eric. “Why The State Attorneys General’s Assault On Internet Immunity Is A Terrible Idea.” June 2013. Forbes. Accessed March 6, 2016. http://www.forbes.com/sites/ericgoldman/2013/06/27/why-the-state-attorneys-generals-assault-on-internet-immunity-is-a-terrible-idea/.
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eBay, Wikipedia, and eHarmony have relied on Section 230 for protection from the posts of its
users.61 Similarly, sharing economy companies like Airbnb and Uber seeking to solidify market
share against established incumbents rely heavily on the protections outlined in Section 230.
State regulators, most notably the National Association of Attorneys General (NAAG),
have been lobbying Congress to provide an additional exemption for state criminal law
violations. Essentially, this small change in the language would open up Internet company
executives to criminal liability for their users’ violations of state laws. This type of regulatory
scheme exists in Europe, where Internet companies are responsible for user-generated content.62
The NAAG claims that the expansion of this provision to encompass state laws will allow state
prosecutors to investigate child trafficking and prostitution activities currently protected by
Section 230. However, sharing economy companies fear that the NAAG amendment would
result in more prohibitive state regulations against their services.63 Whether the NAAG
amendment will gain traction in Congress remains to be seen. As it stands now, Section 230
protects Internet companies from criminal prosecution from user-generated violations. Thus,
regulators have been forced to pursue individual suppliers of the sharing economy goods and
services.
Case Study of Airbnb in New York City:
Why New York City?
61 McNamara, Brittany. "Airbnb: A Not-So-Safe Resting Place." Colorado Technology Law Journal 13, no. 1 (2015): 149-70. Accessed March 27, 2016. Hein Online. 62 Goldman, Eric. “The State Attorneys General Want to Eviscerate a Key Internet Immunity.” June 2013. Forbes. Accessed March 25, 2016. http://www.forbes.com/sites/ericgoldman/2013/06/26/the-state-attorneys-general-want-to-eviscerate-a-key-internet-immunity/#377703a81be4 63 McNamara, Brittany. "Airbnb: A Not-So-Safe Resting Place." Colorado Technology Law Journal 13, no. 1 (2015): 149-70. Accessed March 27, 2016. Hein Online; Also see Goldman, Eric. “Why The State Attorneys General’s Assault On Internet Immunity Is A Terrible Idea.” June 2013. Forbes. Accessed March 6, 2016. http://www.forbes.com/sites/ericgoldman/2013/06/27/why-the-state-attorneys-generals-assault-on-internet-immunity-is-a-terrible-idea/.
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Because the regulations governing Airbnb vary based on locality, it would be difficult to
analyze each and every regulatory approach. We chose to focus the bulk of our case study on the
New York City market for the following reasons. Airbnb has an established presence in New
York. Between 2012 and 2013, over 400,000 visitors used Airbnb’s services in New York City,
and New York City is currently Airbnb’s largest market.64 65 Secondly, Airbnb had a long, highly
publicized regulatory battle with New York Attorney General Eric Schneiderman. Because New
York took a relatively firm stance against Airbnb, the protracted battle revealed many of the
arguments for and against regulations on sharing economy companies like Airbnb.
Overview of Relevant NYC Regulations:
In New York City, the Multiple Dwellings Law governs the space Airbnb occupies.66 The
Multiple Dwellings Law outlines the definitions of the different classes of apartment-style
residences in New York, along with the rules and regulations pertaining to each.67 A “Class A”
residence is defined as “a multiple dwelling that is occupied for permanent residence purposes”
and includes the following
[T]enements, flat houses, maisonette apartments, apartment houses, apartment hotels, bachelor apartments, studio apartments, duplex apartments, kitchenette apartments, garden-type maisonette dwelling projects, and all other multiple dwellings except class B multiple dwellings.68
The law defines a “permanent residence” a “dwelling unit by the same natural person or family
for thirty consecutive days or more.”69 A “Class B” multiple dwelling is one “which is occupied,
64 “Airbnb Economic Impact.” 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9 http://blog.airbnb.com/economic-impact-airbnb/. 65 “Why Is New York City Cracking down on Airbnb?” 2016. PBS NewsHour. Accessed March 28.http://www.pbs.org/newshour/bb/will-new-york-city-shut-airbnb-2/.66 Multiple Dwelling Law, Art. 1, §4.8(a)67 Ibid.68 Ibid.69 Ibid.
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as a rule transiently, as the more or less temporary abode of individuals or families who are
lodged with or without meals,” and includes the following:
[H]otels, lodging houses, rooming houses, boarding houses, boarding schools, furnished room houses, lodgings, clubhouses, college and school dormitories and dwellings designed as private dwellings but occupied by one or two families with five or more transient boarders, roomers, or lodgers in one household.70
For “Class A” dwellings, the law allows for the “occupancy of such dwelling unit for fewer than
thirty consecutive days by other natural persons within the household of the permanent occupant
such as house guests or lawful boarders, roomers, or lodgers.”71 Additionally, the law permits
“incidental and occasional occupancy of such dwelling unit for fewer than thirty consecutive
days by other natural persons when the permanent occupants are temporarily absent for personal
reasons…provided that there is no monetary compensation paid to the permanent occupants.”72
That is, it is illegal under this provision for a permanent resident to receive payment to rent out
their apartment for less than thirty days, if the permanent resident is absent. This presents a major
problem for many Airbnb hosts, as will be detailed in the following section.
New York City also levies a hotel room occupancy tax of 5.875 percent, which amounts
to about 1 percent of the city’s total tax revenue.73 New York Tax Law defines a hotel as a
“building or portion of it which is regularly used and kept open as such for the lodging of guests.
The term ‘hotel’ includes an apartment hotel, a motel, boarding house, or club, whether or not
meals are served.”74 There does, however, exist an important exemption for individuals who rent
out their home on fewer than three occasions or for not more than 14 cumulative days during any
70 Multiple Dwelling Law, Art. 1, §4.971 Multiple Dwelling Law, Art. 1, §4.8(a)72 Ibid. 73 Kaplan, Roberta A. and Nadler, Michael L."Airbnb: A Case Study in Occupancy Regulation and Taxation." University of Chicago Law Review Dialogue 82.103 (2015): 103-104. Hein Online. Web. 10 Feb. 2016.74 New York Tax Law §110
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12-month period.75 While there is some controversy surrounding whether Airbnb listings should
be subject to the tax, the NYC Department of Finance declared them exempt from the tax.76
Despite this ruling, Airbnb has publicly offered to pay their fair share of taxes, provided that
lower-income hosts remain exempt.77
The History of Airbnb in New York:
In October 2013, Eric Schneiderman began his investigation of Airbnb’s presence in New
York City, subpoenaing data on 15,000 Airbnb users.78 This marked the beginning of the highly
adversarial battle between Airbnb and AG Schneiderman. Shortly after receiving
Schneiderman’s subpoena, Airbnb announced its plans to fight to protect the privacy of its
users.79 Matt Mittenthal, a spokesman for AG Schneiderman, stated that the purpose of the
investigation was to “recover millions of dollars in unpaid taxes and to stop the abuse of
Airbnb’s site by operators of illegal hotels.”80 In the same statement, Mittenthal accused Airbnb
of “standing up for highly profitable, illegal businesses that make a huge chunk of its corporate
revenue.”81
Airbnb’s head of global public policy, David Hantman, responded to the Attorney
General’s accusations of protecting illegal hoteliers by asserting that “almost 90 percent of 75 Saunders, Laura. 2015. “Airbnb Income May Be Tax-Free–But There’s a Catch.” Wall Street Journal, Accessed: March 28, 2016 sec. Markets.http://www.wsj.com/articles/popular-tax-break-can-lead-to-filing-hassles-1427982638.76 Kaplan, Roberta A. and Nadler, Michael L."Airbnb: A Case Study in Occupancy Regulation and Taxation." University of Chicago Law Review Dialogue 82.103 (2015): 109. Hein Online. Web. 10 Feb. 2016.77 Chesky, Brian, Oct 3, 2013,“Who We Are, What We Stand For,” Airbnb, Accessed March 27, 2016. http://blog.airbnb.com/who-we-are78 Bloomberg News. 2013. “Schneiderman Investigating Airbnb Users. ”Crain’s New York Business. Accessed March 2016 http://www.crainsnewyork.com/article/20131007/REAL_ESTATE/131009911/schneiderman-investigating-airbnb-users.79 Ibid.80 Harris, Elizabeth A. 2013. “The Airbnb Economy in New York: Lucrative but Often Illegal.” The New York Times, Accessed March 1, 2016.http://www.nytimes.com/2013/11/05/nyregion/the-airbnb-economy-in-new-york-lucrative-but-often-unlawful.html.81 Ibid.
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[Airbnb’s] hosts have only one listing at it’s the home they live in.”82 Airbnb publicized the story
of Tara Robertson, a widowed Manhattan resident who used Airbnb’s website to make extra
money to cover her expensive medical bills.83 Ms. Richardson, in a video launched by Airbnb,
declared that New York officials were “stepping over dimes to pick up nickels,” alluding to their
emphasis on hotel tax dollars and disregard of the overall economic prosperity Airbnb brings to
New York.84 Airbnb’s users also revealed their opposition to AG Schneiderman’s investigation,
gaining nearly 20,000 signatures on a petition asking the state senate to revise the Multiple
Dwellings Law in Airbnb’s favor.85 Because the law, written before Airbnb became popular in
New York, had the intent of combatting slumlords operating illegal hotels, Airbnb and its
supporters argued that the legislature should create a exemption for Airbnb hosts.86
Airbnb filed a motion to quash the Attorney General’s subpoena, arguing that it was
“without factual basis, overbroad and unduly burdensome.”87 In response, the Attorney General’s
Office submitted the affidavit of Sumanta Ray, Director of Research and Analysis with the
Investor Protection Bureau of the New York State Attorney General.88 Ray’s findings indicated
that while a majority (88 percent) of Airbnb hosts listed only one property, the 12 percent that
listed more than one accounted for 30 percent of the listings on Airbnb’s site.89 Ray also found
82 Ibid.83 Ibid.84 Whitehouse, Kaja. 2013. “Attorney General’s NYC Battle with Airbnb Targets Widowed Grandma.” New York Post. Accessed March 1, 2016. http://nypost.com/2013/11/13/ny-attorney-general-targets-widow-in-airbnb-battle/.85 Kerr, Dara. 2013. “Airbnb Host Creates Petition to Confront New York Lawmakers.” CNET. Accessed March 6. http://www.cnet.com/news/airbnb-host-creates-petition-to-confront-new-york-lawmakers/.86 Ibid.87 Decision and Order, Airbnb v. Schneiderman, 989 N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at http://www.documentcloud.org/documents/1159527-airbnb-new-york-decision.html#document/p9 88 Affidavit of Sumanta Ray in Opposition to Airbnb, Inc’s Motion to Quash and in Support of the Attorney General’s Cross-Motion to Compel Responses to an Investigatory Subpoena, Airbnb v. Schneiderman, 989 N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at http://www.documentcloud.org/documents/1145999-new-york-attorney-general-analysis-of-airbnb.html#document/p3. 89 Ibid.
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that a majority of hosts rented their apartments for less than thirty days, in clear violation of the
Multiple Dwellings Law.90 Based on this information, AG Schneiderman argued that the state’s
investigation was more than a mere “fishing expedition,” as Airbnb had previously asserted.91
In May 2014, the Supreme Court of New York sustained Airbnb’s claim that state’s
subpoena was too broad in certain areas.92 On the tax issue, the Court declared many of the
individuals for whom the Attorney General’s Office was requesting data may be exempt from the
hotel occupancy tax, since their “apartments are rented on fewer than three occasions or for not
more than 14 days in the aggregate during any four consecutive quarters or any 12-month
period.”93 Additionally, Multiple Dwellings Law only applies to cities with a population of
greater than 325,000 persons, but the original subpoena did not limit its investigation to New
York City Airbnb hosts. In this respect, the subpoena was too broad.94 However, the Court ruled
in favor of AG Schneiderman’s office with regard to Airbnb’s argument that the subpoena was
overly burdensome.95 Ultimately, the gave the Attorney General the opportunity to narrow down
the subpoenas to those hosts who are not exempt from the tax and to those who are violating the
Multiple Dwellings Law. In July 2014, Airbnb agreed to provide the Attorney General’s office
with the data of 124 hosts who “may be flagrantly misusing [Airbnb’s] platform.”96 Additionally,
90 Ibid.91 Watson, Bruce. 2013. “Airbnb’s Legal Troubles: The Tip of the Iceberg for the Sharing Economy?” The Guardian, sec. Guardian Sustainable Business. Accessed March 1, 2016. http://www.theguardian.com/sustainable-business/airbnb-legal-trouble-sharing-economy 92 Decision and Order, Airbnb v. Schneiderman, 989 N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at http://www.documentcloud.org/documents/1159527-airbnb-new-york-decision.html#document/p993 Ibid.94 Ibid.95 Ibid.96 Bort, Julie. 2014. “Airbnb: 124 New York Airbnb Hosts ‘May Be Flagrantly Misusing Our Platform.’”. Accessed March 6, 2016.http://www.businessinsider.com/airbnb-gives-ag-info-on-124-ny-hosts-2014-8.
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Airbnb provided “anonymized data” for approximately 16,000 hosts to the Attorney General’s
office.97
In October 2014, Attorney General Schneiderman released a comprehensive report
outlining the use of Airbnb in New York City. The report contained data on Airbnb listings from
2010 to 2014 and found that 72 percent of Airbnb units violating the Multiple Dwellings Law, as
depicted in Figure 5.98
Figure 5: Data on short-term Airbnb rentals violating NY laws
AG Schneiderman’s report also calculated the hotel occupancy tax liability from these Airbnb
listings roughly equal to 33 million over the four and a half year span.99 The report also classified
Airbnb’s “commercial users” as hosts who rented three or more units.100 Of the Airbnb hosts
analyzed, Schneiderman found that 6 percent fell into this category. However, these 6 percent of
97 Burnett, Stephanie. 2014. “Airbnb Hands Over Data on 124 Hosts in New York City to the Authorities.” Time, Accessed March 6, 2016.http://time.com/3180103/airbnb-hands-over-data-on-124-hosts-in-new-york-city-to-the-authorities/.98 United States. New York State Office of the Attorney General. “Airbnb in the City.” By Eric T. Schneiderman. 2014. 99 Ibid., 9.100 Ibid., 10.
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hosts accounted for 37 percent of Airbnb’s revenue.101 Following this discovery, Airbnb publicly
stated their efforts to restrict the activity of these commercial users.102
Schneiderman’s report did not mark the end of the legal battle between Airbnb and New
York officials. Both the Attorney General’s office and the New York City Mayor’s Office are
fighting hard to shut down illegal hotels resulting from Airbnb’s services and to collect hotel
occupancy taxes. In November 2015, New York City Mayor Bill de Blasio appropriated 10
million dollars to the Mayor’s Office of Special Enforcement to investigate and ultimately
eliminate violations of occupancy law resulting from Airbnb’s services.103 Individual crackdowns
continue to occur throughout the five boroughs. In February 2016, the Mayor’s Office of Special
Enforcement raided a property in Brooklyn renting out rooms for as low as 31 dollars per
night.104 As long as Section 230 remains unchanged, New York officials will have to continue
pursuing individual Airbnb hosts for state law violations.105 Eliminating illegal hotels one host at
a time costs both time and resources. Before long, New York, along with many other states and
localities, will have to develop a comprehensive set of policies to deal with the issues Airbnb
presents. The following section outlines a logical policy approach that promotes Airbnb’s
positive impacts on hosts, guests, and local businesses, while mitigating the risks the company
poses.
Airbnb’s Stakeholders
101 Ibid., 10.102 Ibid., 11.103 Fermino, Jennifer. 2015. “NYC Will Spend $10M to Crack down on Illegal Hotels.” NY Daily News. Accessed March 30, 2016. http://www.nydailynews.com/new-york/nyc-spend-10m-crack-illegal-hotels-article-1.2436047.104Mashayekhi, Rey. 2016. “City Crackdown on Airbnb, Illegal Hotels Hits East Williamsburg.” The Real Deal New York. Accessed March 27, 2016 http://therealdeal.com/2016/02/29/city-crackdown-on-airbnb-illegal-hotels-hits-east-williamsburg/.105 47 U.S. Code §230 Protection for Private Blocking and Screening of Offensive Material
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Stakeholders involved in the sharing economy, specifically in rental companies like
Airbnb, range from renters and guests to the Federal government. Given the complicated nature
of renting out homes in compliance with city and state regulations, the hierarchical structure
below shows the connections between each actor.
Figure 6: Stakeholder hierarchy Chart
According to this structure, the federal government sits on top. Directly under the federal
government lie the states. Between the states and the federal governments overarching rules and
regulations guide a broad implementation of Airbnb counties and cities. From these regulations,
governors, landlords, and Airbnb set their own regulations to influence Airbnb in either a
positive or negative direction. Of course, Airbnb wants to positively influence its position in
cities and in its terms and conditions, informs hosts of their responsibility to follow local rules
and regulations. Indeed, the compliance between hosts and guests and local governance does not
always work smoothly and in some of these cases, Airbnb becomes legally involved as in Nigel
The Federal Government
States
GovernorsLandlords
Airbnb
Host
Guests
Insurance
Neighbors
Local Businesses
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Warren’s court case.106 The involvement of different parties including the state, landlords, and
Airbnb influence the relationships between local businesses, hosts, neighbors, and guests. The
tier under with local business, hosts, and neighbors are the stakeholders who are directly affected
as well as the next level of hosts, guests, and neighbors complicated Nigel Warren’s story. The
connections between each actor, for example, hosts relationships with their neighbors and
landlord and guests respecting the habits of neighbors and community surrounding the hosts
home creates intricate patterns between the stakeholders. Ultimately, each actor influences the
others. Local business owners either boutique or restaurant owners, for example, want to benefit
from guests dining or buying items. The guests help businesses like these flourish. In turn,
however, it is assumed that guests comply with neighborhood and landlord regulations.
How Should Airbnb Be Regulated?
Airbnb brings benefits to many different groups of people. In New York, 62 percent of
Airbnb hosts claimed that the money earned from this service helped them stay in their homes.107
Guests take advantage of Airbnb’s lower prices by extending their stays, thus generating revenue
for local businesses.108 Airbnb does, however, present certain risks, and governments should
develop practical and comprehensive policy approaches to address them. But governments
should be careful not to stifle the benefits that Airbnb brings. This section will outline the
specific risks posed by Airbnb and recommend a logical regulatory approach that would strike a
balance between protecting public welfare and promoting innovation. These policy
recommendations are targeted at the state and local policymakers that largely handle zoning
106 Lieber, Ron. 2013. “A $2,400 Fine for an Airbnb Host.” The New York Times Bucks Blog. Accessed March 1, 2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.107 “Airbnb Economic Impact.” 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9 http://blog.airbnb.com/economic-impact-airbnb/.108 Ibid.
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regulations. Local and state policymakers are composed of two groups: the elected officials (i.e.,
legislative and executive branches) and the unelected bureaucratic agencies who enforce the
laws. A successful regulatory framework depends on both the legislature’s passing of the law
and the agencies’ enforcement of it. Certain recommendations will target Airbnb and other
stakeholders who are affected by the company’s presence. As will be shown, many of the issues
need not legal regulations to be resolved, but rather active participation and compromise by
relevant stakeholders.
Effects of Short-Term Airbnb Rentals on Housing Supply:
A major concern of local government officials is the effect of Airbnb on the supply of
affordable long-term housing. Because short-term rentals tend to be more lucrative than long-
term rentals, officials fear that Airbnb’s presence will entice landlords to increase short-term
rentals, thereby limiting the supply of affordable long-term housing. Lower supply translates to
higher prices. Research on the Los Angeles housing market describes how the presence of
Airbnb and the growth in short-term rentals has effectively driven up rent prices, particularly in
gentrifying neighborhoods.109 The crisis is particularly severe in cities like Los Angeles, where
vacancy rates are near zero.110 When long-term residential options are converted into short-term
rentals and effectively taken off the market, it causes a sudden supply shock.111 The nature of the
housing market is such that increasing supply requires substantial investments in terms of both
time and capital, exacerbating the effects of the supply shock.112 In Los Angeles, the wealthiest
109 Lee, Dayne. “How Airbnb Short-Term Rentals Exacerbate Los Angeles’s Affordable Housing Crisis: Analysis and Policy Recommendations.” Harv. L. & Pol’y Rev. 10(2016): 229-255110 Ibid., 237.111 Ibid., 237.112 Ibid., 230.
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neighborhoods see the greatest Airbnb short-term rental activity.113 The supply shock and
subsequent rent spike as described above forces middle-income renters out of these
neighborhoods into adjacent lower-income ones.114 The influx of middle-income renters into
gentrifying neighborhoods, prices out the lower-income individuals who previously occupied
those areas.115 In one year, rents increased by over 7 percent in gentrifying neighborhoods in Los
Angeles, and by over 9 percent over the course of two years.116 New York officials fear a similar
outcome.117
According to Attorney General Eric Schneiderman’s report on Airbnb in New York City,
almost 2,000 individual units were rented out for short-term use for at least six months of 2013,
deeming them unavailable for long-term purposes.118 Furthermore, the proportion of short-term
rentals in New York increased each year from 2010 to 2013, as shown in Figure 7.119 As shown
in the charts, the share of rentals used for short-term purposes for six months or more increased
from 18 percent of rentals in 2010 to 38 percent in 2013.120
113 Ibid., 240.114 Ibid., 240.115 Ibid., 240.116 Ibid., 242. 117 United States. New York State Office of the Attorney General. “Airbnb in the City.” By Eric T. Schneiderman. 2014. p. 12.118 Ibid., 12.119 Ibid., 13.120 Ibid., 13.
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Figure 7: Share of Host Revenue from Short-Term Rentals
The geographic distribution of these short-term rentals has been another cause for
concern for city and state officials. In New York, many of the short-term Airbnb listings fall
outside the highly commercialized areas like Times Square. Rather these rentals are often in
residential neighborhoods like SoHo and Williamsburg, Brooklyn.121 Like the Los Angeles case,
middle-income renters may become forced out of these neighborhoods into cheaper areas. The
gentrification of those neighborhoods will then drive up housing prices for New York’s lowest-
income renters.122
The data presented in the Attorney General’s report on Airbnb in New York show that
short-term rentals resulting from Airbnb’s services are in fact increasing.123 However, the
121 “Airbnb Economic Impact.” 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9 http://blog.airbnb.com/economic-impact-airbnb/; also see United States. New York State Office of the Attorney General. “Airbnb in the City.” By Eric T. Schneiderman. 2014. pp. 15-16.122 Lee, Dayne. “How Airbnb Short-Term Rentals Exacerbate Los Angeles’s Affordable Housing Crisis: Analysis and Policy Recommendations.” Harv. L. & Pol’y Rev. 10(2016): 229-255123 United States. New York State Office of the Attorney General. “Airbnb in the City.” By Eric T. Schneiderman. 2014.
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increase in the number of short-term rentals may not necessarily translate to the limited supply of
long-term housing. Individual tenants renting out their own apartments for a few days at a time
when they are out of town pose little threat to the long-term housing market. In New York, 87
percent of hosts fall into this category. Those who pose a formidable threat to the supply of
affordable long-term housing are the hosts who list multiple properties on Airbnb, defined as
“commercial users” by Attorney General Schneiderman’s office.124 In New York, these
“commercial users” accounted for only 6 percent of hosts, but 36 percent of all reservations
made between 2010 and 2014.125
An effective policy approach would target these types of users and limit the number of
listings they can put on Airbnb’s site. Airbnb should cooperate with government officials in
limiting these “commercial users,” as they have stated they would in the past, for several
reasons.126 First, affordable housing is one of Airbnb’s core values.127 Airbnb was founded in
2007 by individuals seeking to make housing more affordable in San Francisco.128 Second,
without a new set of policies written with Airbnb in mind, city and state officials, like those in
New York, will continue to pursue individual hosts.129 The experiences of Nigel Warren will
become far too common, except Airbnb will not realistically be able to step in on behalf of every
host facing fines and penalties. Individual hosts will soon become afraid to list their apartments
on the website and Airbnb’s entire trust-based business model will collapse. Airbnb should work
with governments to include provisions in laws like the Multiple Dwellings Law allowing for
124 Ibid., 10.125 Ibid., 10.126 Ibid., 11.127 Chesky, Brian. 2013. “Who We Are, What We Stand for.” The Airbnb Blog - Belong Anywhere. Accessed March 30, 2016. http://blog.airbnb.com/who-we-are/.128 Ibid.129 Fermino, Jennifer. 2015. “NYC Will Spend $10M to Crack down on Illegal Hotels.” NY Daily News. Accessed March 30, 2016. http://www.nydailynews.com/new-york/nyc-spend-10m-crack-illegal-hotels-article-1.2436047.
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individuals to rent out their own apartments on sites like Airbnb. In return, Airbnb should limit
the number of listings an individual can place on the site. While this might hurt Airbnb’s revenue
stream in the short term, it is a logical way for the company to preserve its business model and its
operations as a whole.130
Another feasible alternative, as proposed by Dayne Lee, would involve a community
benefits agreement (CBA) model, where key stakeholders collaborate and compromise in order
to solve the issue of affordable housing supply.131 Under this model, Airbnb and property
developers looking to build and capitalize off of short-term rentals could work with New York’s
government to prevent an affordable housing crisis. Lee notes the possibility of property owners
or developers setting aside a set amount of units in newly constructed apartment buildings as
affordable long-term housing options, while reserving others for short-term renters.132
Governments and developers, under this proposal, could work together to expand the total supply
of housing, allowing room for both short-term renters and long-term residents. This plan also
aligns well with Airbnb’s core values of promoting affordable housing. Airbnb would capitalize
off of the public relations opportunities. This plan provides a feasible way for individuals to take
advantage of Airbnb’s unique business model, while making housing more affordable for low-
income renters.
Insurance and Safety:
The issue of safety has come up time and time again in the debate on how to regulate
Airbnb and other sharing economy companies. From the point of view of a host, the idea of
130 Between 2010 and 2014, “commercial” rental properties accounted for 37 percent of Airbnb’s revenue in New York City; see United States. New York State Office of the Attorney General. “Airbnb in the City.” By Eric T. Schneiderman. 2014, p. 10.131 Lee, Dayne. “How Airbnb Short-Term Rentals Exacerbate Los Angeles’s Affordable Housing Crisis: Analysis and Policy Recommendations.” Harv. L. & Pol’y Rev. 10(2016): 229-255132 Ibid., 251.
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having a stranger stay unaccompanied in your apartment may seem strange. Equally strange is
the idea of actually sleeping in a stranger’s bed. People worried about theft, destruction of
property, or even kidnapping may argue that staying in a hotel is much safer than staying in an
Airbnb apartment. Stories of foul play in Airbnb rentals have become highly publicized. For
example, in 2014, a resident of Glendale, California using Airbnb to rent out his home as a
“party house” caught much news coverage.133 While these incidents are few and far between and
do not characterize the vast majority of Airbnb experiences, they need to be addressed. Failure to
do so will not only compromise public safety, but will also undermine Airbnb’s business model.
Airbnb largely relies on self-regulation between its users in order to ensure safety and
reliability. All users must make a profile and both hosts and guests receive public ratings and
comments from past rental experiences. Most importantly, hosts have the right to deny potential
guests if their ratings are not up to snuff. In order to increase the reliability of this internal review
system, Airbnb enacted several important changes to the system in July 2014.134 For instance, in
order to prevent retaliatory actions in response to a bad rating, hosts and guests receive notice of
their ratings at the same time.135 The company has also shortened its review period to guarantee
that experiences are fresh in the minds of the rating party.136 Lastly, Airbnb’s new review system
asks guests to specifically share one thing they loved about the experience and one thing they
wish to see improved.137 All of these reforms serve to provide honest and informative feedback
on Airbnb listings, ultimately improving the safety of users.
133 Levine, Brittany. 2014. “Airbnb ‘Party House’ in Glendale Shut down after Police Visits.” Latimes.com. Accessed March 31, 2016. http://www.latimes.com/local/lanow/la-me-ln-airbnb-party-house-glendale-20140106-story.html.134 “Building Trust with a New Review System - Airbnb.” 2014. The Airbnb Blog - Belong Anywhere. Accessed March 1, 2016. http://blog.airbnb.com/building-trust-new-review-system/.135 Ibid.136 Ibid.137 Ibid.
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Self-regulation certainly has its benefits. The marginal costs of implementation and
enforcement are low, and Airbnb’s growth and success speaks to the merits of self-regulation. Its
business model is based on trust between its users; if users feel unsafe, they will elect not to use
the service. That is why, according to Steve Webb of Turo, a car-sharing service, sharing
economy companies have an incentive to adhere to safety regulations even stricter than those
imposed by the government.138 Without building a high level of consumer trust, sharing economy
companies like Airbnb and Turo cannot seize market share from established incumbents.
However, Airbnb’s success relies on more than trust between hosts and guests. There are
other stakeholders on whom Airbnb’s business model depends, namely insurance companies.
Companies providing renter’s or homeowner’s insurance take on added risk when homes or
apartments they insure are being rented on sites like Airbnb. Airbnb has attempted to address this
issue through its “Host Protection Insurance Plan,” which covers up to 1 million dollars in third-
party claims of injury or property damage.139 Formerly, Airbnb only offered a “Host Guarantee”
policy, which acted as a supplement to primary homeowner’s or renter’s insurance.140 The “Host
Protection Insurance” plan was intended to be a more comprehensive policy, addressing the gaps
in the “Host Guarantee” policy.141 However, the “Host Protection Insurance” policy has several
important flaws. For example, a closer look at the “Host Protection Insurance” indicates that all
claims must be filed within 14 days, hosts must be in compliance with all other Airbnb terms in
order to receive a reimbursement, and hosts must attempt to resolve the conflict with the guest
138 Kuo, John. 2013. “How Should Government Regulate The Sharing Economy?”NerdWallet. Accessed March 27, 2016. https://www.nerdwallet.com/blog/investing/government-regulate-sharing-economy/.139 “What’s the Difference between Airbnb's Host Guarantee and Host Protection Insurance? | Airbnb Help Center.” 2016. Accessed April 23. https://www.airbnb.com/help/article/938/what-s-the-difference-between-airbnb-s-host-guarantee-and-host-protection-insurance.140 Ibid.; also see Hayes, Galen. 2016. “The Scary Insurance Reality for Airbnb Hosts.” Accessed April 23.http://www.propertycasualty360.com/2016/01/05/the-scary-insurance-reality-for-airbnb-hosts.141 Hayes, Galen. 2016. “The Scary Insurance Reality for Airbnb Hosts.” 2016. Accessed April 23.http://www.propertycasualty360.com/2016/01/05/the-scary-insurance-reality-for-airbnb-hosts.
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before filing a claim, to name a few.142 Furthermore, and perhaps most important, claims must be
filed with a renter’s or homeowner’s insurance companies prior to claiming loss under the “Host
Protection Insurance” policy.143
Insurance companies have taken steps to limit their exposure by refusing to cover Airbnb
hosts.144 Julie Pfeffer, a Delaware resident and Airbnb host, ran into some trouble with her
homeowner’s insurance provider, State Farm, after disclosing her activity as an Airbnb host.145
Despite Ms. Pfeffer’s long history as a low-risk homeowner with State Farm, the insurance
company no longer wanted to take on the additional risk.146 State Farm offered to sell Ms.
Pfeffer a commercial policy, since she was in essence using her home as a place of business.
However, that policy was much more expensive and would consume the profits she made as an
Airbnb host.147 Considering that Ms. Pfeffer’s insurance company viewed her as a good
customer, it is hard to imagine how an insurer would respond to a less reputable client. Of
course, Airbnb hosts can choose not to disclose their commercial activity, but if and when these
details are exposed, insurance companies would likely be even less forgiving. Unless Airbnb
works with insurance companies to form more comprehensive plans that shift the risk away from
the insurers, hosts may find themselves subject to higher premiums or no coverage at all. Higher
insurance premiums would cut into the profits of Airbnb hosts and the threat of termination
would likely deter them from using the site at all. Insurance companies, thus, play an important
142 Ibid.; also see “Host Protection Insurance - Airbnb.” Accessed March 31.https://www.airbnb.com/host-protection-insurance.143 Ibid. 144 Lieber, Ron. 2014. “The Insurance Market Mystifies an Airbnb Host.” The New York Times, December 19.http://www.nytimes.com/2014/12/20/your-money/the-insurance-market-mystifies-an-airbnb-host.html.145 Ibid.146 Ibid.147 Ibid.
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role in the success of Airbnb and Airbnb needs to formulate a better policy to address insurers’
concerns.
Airbnb’s self-regulation scheme lends little consideration to the externalities its services
impose upon the communities in which Airbnb operates. For example, neighbors may become
frustrated with unruly vacationers and landlords and property managers may respond by banning
Airbnb-related activities in their buildings. Airbnb’s reputation-driven success relies on
incorporating important stakeholders in order to form practical solutions that limit these
externalities, while maintaining the innovative and beneficial services Airbnb delivers. A policy
of “regulated self-regulation” would accomplish this. Under this model, a committee consisting
of relevant stakeholders (i.e., Airbnb executives, state government officials, homeowners’
associations, condominium boards, insurance executives, etc.) would enter contractual
agreements to regulate Airbnb’s activities within a city or state. The committee’s policies would
be bound by the contractual agreements between its members, thus giving them weight and
enforceability. This idea of committee-driven regulated self-regulation adds a sense of
transparency to the policymaking process. Each represented interest thus has an added incentive
to contribute practical ideas that would serve the public good.
Airbnb’s unique business model presents a plethora of regulatory issues that if unsolved,
can compromise both public welfare and Airbnb’s future success. Therefore, Airbnb has an
incentive to work with regulators to create feasible and pragmatic solutions. Airbnb and its users,
however, should be optimistic, as many policy alternatives exist to mitigate the company’s risks
to public safety, while preserving the innovation and efficiency that has brought benefits to so
many of its users.
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