Sharing economy and emerging legal dilemmas

About 40 years ago Bill Gates dropped out of Harvard to make a breakthrough with the idea of personal computing and realize the potentials of his newborn Microsoft. Only ten years later, in 1985, the revolution of PCs was brought to such degree that its impact was not only seen in technology but also had its echo in the changing society. Today, the influence that the internet, technology and large-scale data storage have had on the global economy and the law is thrilling. New business models introduced by Uber, Airbnb and, last but not least, Facebook, push us to reconsider traditional, civil-law relations, which were built-up in the Roman era and, we have thought, should remain the same ever after. 

The two-sided market theory spiced up 

"Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate,” someone has put down. To explain the uniqueness of these new business ideas (also known as sharing, collaborative or peer-to-peer economy) we can think of them as a special case of a “two-sided” or“platform” market which employs technology to bring together large numbers of buyers and large numbers of sellers. The traditional idea of sharing, empowered with the-easy-to-use digital technologies and intensive data processing, make them innovative and revolutionary. Now the question is: what does it mean for the law? Another revolution coming up or is it just a continuation of the progress that started with Gates? 

Traps of self-regulation

Koopman et al. (2015) see the key contribution of sharing economy in the fact that it has overcome market imperfections without recourse to traditional forms of regulation. That is true but at what price? A good example is crowd-investing: the shortage of business initiatives on the one hand and limitless entrepreneurial online opportunities on the other have encouraged young business men to shift their focus from the traditional sources of capital towards the funds collected via internet platforms. Instead of using traditional corporate forms, these platforms are making use of more lenient contractual instruments and thus often walking on the edge of law. Companisto, a German platform, attracts the equity investors by offering them the so-called personal share certificate which very much resembles a security. However, the fine print explains that the investment is actually run in the form of a subordinated profit-participating loan, which is no more than a special type of a loan, a contractual instrument giving by no mean similar protection as corporate institutes. While in macro-economical terms the business model has great potential, the current legal setting is a downside and needs to be carefully addressed by the legislator, sooner or later.

Another, even more striking example is Uber. In the last week we could read about the taxi drivers in Paris protesting against Uber and about their colleagues from other EU member states threatening with the same actions if Uber appears as a competitor. Again, we can note that the lack of regulation for this new business model is a problem (for example, regulation of civil liability in cases of car accidents), but it does not mean we should get rid of Uber at all. I have spoken to colleagues from Brussels recently and they have told me they prefer Uber to normal taxis – it is faster, cheaper and more convenient. So should consumers give up a better service to prevent traditional taxi industry loses its income? Well, this is certainly not the case. If we had taken the evolution in that way, I would be still using a typewriter to write this post (and Bill Gates would have got no chance to earn his millions).

Legislators facing a great challenge

No doubt, it will be hard for the decision makers to find the right balance and put down the rules that would justly regulate the area without undermining economic efficiency. Marvel’s (1977) explanation of the origin of the British factory acts in the 1830s can be a source of inspiration. His theory contrasted the conventional idea that such laws were in the public interest because they limited the working hours of women and children. Marvel argued that the regulation of hours favored steam mill over water mill owners. The latter could only operate when the water flow was sufficient, and hence ran long hours when stream conditions were good. The hours restrictions curtailed the ability of the water-driven mills to make up for lost output when streams were low. According to Marvel’s estimates, the resulting rise in textile prices transferred a significant amount of wealth to steam mill owners, who could operate on a regular basis. The act obviously followed the objective of maximizing the public wealth by favoring the most efficient technological solution (although one could argue not really a sustainable one) but it also managed to achieve another, more altruistic goal by limiting the children and women’s work. This was a great example how innovation in technology can be facilitated by innovation in law. Definitely some food for though for our legislators …

Copyright The Economist