Tech Outregulates Regulators

I Just finished listening to a Freakonomics podcast episode, Regulate this!, that outlines the battle between local governments and peer-to-peer (P2P) services such as AirBnB], Uber, Lyft, and EatWith. Freakonomics interviews people on both sides, including cofounders of AirBnB, Lyft, and EatWith, as well as New York State Senator Liz Kruger.

Throughout the podcast, Kruger repeatedly highlights how P2P marketplaces aren’t regulating the users of their respective marketplaces, and thus consumers and bystanders could be adversely impacted without regulations and protections in place. She cites moving drug labs that operate via AirBnB; Lyft and Uber drivers that may not have insurance, and at-home chefs that may be intentionally or accidentally poisoning their guests.

The fundamental premise of Kruger’s argument is that consumers and bystanders must be protected, and that top-down government regulation is the best, and perhaps even only, way to protect consumers.

Her argument is by all means logical. She has hundreds of years of history backing her argument. Governments regulate industries to try to ensure fair outcomes for all stakeholders. But her argument also fails to account for a few of the most profound aspects of human behavior and sociology: the power of social norms and reputation and the power of creating transparency through technology.

These P2P-based businesses are by all accounts exceptional. They are each worth over $1B and are only a few years old. The market has proven that they solve real problems that millions of people face at spectacular scale. And like all businesses that operate at massive scale, there are a few bad apples left in their wake.

All successful P2P businesses are based on identity, reputation, and trust. Each of these services goes to extreme lengths to ensure a vibrant and healthy community:

eBay - after every transaction, buyers and sellers are asked to rate one another. Many sellers highlight their seller ratings in new and ongoing listings.

AirBnB - after every transaction, AirBnB offers discounts to guests to review their host. Hosts must review their guest before they can accept a new guest.

Uber / Lyft - Both services require that riders and drivers rate one another after each and every transaction. Neither party can partake in another transaction without rating the party from the prior transaction. Moreover, Uber and Lyft perform background checks on all drivers, require valid and updated vehicle inspections, and mandate a current insurance policy.

These businesses strongly encourage - and in some cases force - users to rate one another to build a trust-based community and marketplace. The reputation score tied to each party is based on the sum total of every single transaction each party has with the system.

On the other hand, when governments regulate businesses, they tend to review/approve businesses prior to opening, and on some periodic ongoing basis. In many cases, the business being regulated by the government knows approximately when the government may be coming by for a regulatory inspection.

In this light, it would appear that crowd-sourced regulation is actually stronger than government-mandated regulation. Crowd-sourced regulation is most certainly more granular, more frequent, and less prone to bias and corruption. Perhaps more interestingly, each of these crowd-sourced services also tends to offer better service than their respective traditional retail analogs:

Uber and Lyft drivers are known to be quite friendly and enthusiastic. Many offer complimentary water. Uber and Lyft both go to great lengths to build a community among their drivers and to ensure that drivers provide a great customer experience.

AirBnB hosts are generally warm and welcoming people and offer stellar traveler experience. I’ve used AirBnB four or five times. All of my hosts offered home-cooked breakfasts and bars for the road at fraction the cost of nearby hotels. This is perhaps largely due to self- selection of hosts, but is no less relevant. Hosts are thankful for the opportunity to earn money when they otherwise would not, and want to work hard to earn guests’ business in a competitive AirBnB marketplace.

These P2P marketplaces ensure and promote high-quality for every transaction by promoting accountability during every transaction. The government will never be able to regulate these services at this level of granularity because governmental approaches to regulation are intrinsically top-down as opposed to bottom-up.

Everyone, for all of our sakes, regulate one another!