Regulate This! (Ep. 177)

Listen now:
Airbnb ad

Airbnb graffiti in the New York subway.

A battle is being waged between the Internet and the State, and this episode of Freakonomics Radio gives you front-row seats. It’s called “Regulate This!” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

At issue is the so-called sharing economy, a range of services that facilitate peer-to-peer transactions through the Internet. Companies like Airbnb, Uber, and Lyft have seen rapid growth and eye-popping valuations, but as they expand around the world, they are increasingly butting heads with government regulators.

In this episode, you’ll hear from Nathan Blecharczyk, the co-founder and CTO of Airbnb (now valued at roughly $10 billion), and one of the youngest billionaires in the world. Blecharczyk tells Stephen Dubner the story of Airbnb’s founding, how it initially struggled to find investors, and what kind of obstacles it still faces daily. In New York City, for instance, it’s estimated that about two-thirds of its business activity is illegal. That’s a big concern for New York State Senator Liz Krueger, known as “Airbnb’s doubter-in-chief.”

In 2010, Krueger was the chief sponsor of legislation that came to be known as the Illegal Hotel Law, which has made it harder for New Yorkers to legally rent out their rooms through Airbnb. Blecharczyk argues that it’s time for lawmakers like Krueger to recognize the reality of Airbnb, which he estimates will bring in $768 million worth of annual economic activity in New York:

BLECHARCZYK: We’re not advocating that there shouldn’t be rules. We’re just saying that things have evolved and it’s worth taking a fresh look from the ground up.

Krueger, meanwhile, argues that current laws aren’t strict enough:

KRUEGER: I want to look at more enforcement, perhaps increase fines, and penalties. I do have a very serious frustration that the kind of law that we really need needs to be federal because the state is superseded by federal law when it comes to regulating online business. Some people seem to think that if you’re a business model that’s on the internet it’s like magic and hocus pocus. It’s just business. And there’s a reason for government to regulate business, whether it has a physical site somewhere or whether it’s in the cloud.

Inspired by Airbnb, the entrepreneur Guy Michlin co-founded EatWith, which enables cooks to convert their homes into restaurants. EatWith has yet to clash with regulators, but he’s bracing for the inevitable:

MICHLIN: I think that sometimes, or actually many times, the regulator is a little bit behind to catch up with technology… And if you think about Airbnb, it’s obvious that this is a phenomenon that’s not going to go away…. Obviously the regulator will need to come in and hopefully in a dialog with all the different constituencies, adapt and create a new regulation that fits the reality.

The ride-sharing company Lyft, meanwhile, has engaged in high-profile showdowns with state regulators around the country. John Zimmer, its co-founder and president, explains:

ZIMMER: They interpret laws one way and are trying to do their job. And we interpret laws another way and are trying to innovate. And those two things are at odds, and the timelines are at odds. And if we took the approach of, “Hey, let’s wait and see what the government does to create a path that is very, very clear … then we wouldn’t be operating anywhere.

Lyft recently got into a head-on collision with New York State regulators, including the office of Attorney General Eric Schneiderman (which has also clashed with Airbnb). Schneiderman’s chief of staff Micah Lasher tweeted that Lyft and Zimmer were “not just ‘disruptive’ but also personally dishonest.”

It might be easy to conclude that state regulators are clamping down on these companies in large part to protect the entrenched hotel and taxi industries. Lasher says this isn’t the case, that the A.G.’s office isn’t against innovation or competition, but is instead just looking out for the public:

LASHER: One of the big issues is the question of externalities and external impacts. In other words, if my next-door neighbor is using their apartment as a hotel room, they’re not just running a risk of their apartment getting trashed, they’re having an impact on me. Similarly, in the case of Lyft, if one of those drivers gets into a car accident, doesn’t have appropriate insurance, that can have an impact on a whole bunch of folks who did not sign up for that.

Throughout the episode you’ll hear from award-winning Stanford economist Jonathan Levin, who specializes in Internet marketplaces. Levin tells us a story about a brilliant business idea he had as a kid — and how mobile Internet beat him to the punch.


Does this mean that everyone in New York has to live in Times Square? What if someone specifically chose to live in an area that doesn't have a lot of tourists? Is it fair for people in the apartments or homes around them to turn it into a tourist district by using their homes as motels and restaurants? I actually don't see what the Internet has to do with this. The idea of renting out a room isn't new. In fact it's pretty old. It's regulated because many people don't want to live with the traffic and noise that goes along with a motel. If the Internet and innovation mean that all neighborhoods have to be open to commercial restaurants and motels, what about other businesses? Should we have AirCarlot and UberGravelPit. Think of how much money people could make if they could use their yards to sell used cars and mine gravel.


I'm not sure how one would go about measuring it, but I'd love to see the economic impact of tourists who lodge at AirBnB properties in NYC. Last October, I was part of a group of 30 people who travelled to NYC for a wedding from Australia. Of the 30, 20 of us found accommodation through AirBnB and spent an average of 9 days in the city. By staying in an apartment for <$200 a night, my partner and I were able to stay in the the city much longer than we would have been able to if we were staying at a hotel. We spent our 'NYC budget' but I believe the money was spread out further between lodging, dining and entertainment.


There are many anecdotal arguments on both sides of this equation. The 'massive' externalities of raucous sex and drug crazed guests staying next door vs. economic improvement through creative destruction and innovation.

But what do the data say? What's really happening here?

That's what I want to hear from Levitt and Dubner.


The problem of "raucous sex and drug crazed guests staying next door" is hardly limited to AirBnB &c. Ever stayed at a hotel which was hosting a convention?

Scott Ruffner

Right...which is why you don't mix that with residential occupancy. I think you're making the regulator's argument.

Scott Ruffner

Hilariously slanted piece preaching the wonders of "disruptive technology" and "creative destruction".

The revealing truth came out when Lyft's Zimmer admitted that when Lyft operates as what it really is: a cab company - very little is "disrupted". As Kreuger correctly observed, the "internet" doesn't in and of itself constitute a "creative destruction" of old technology. There are (at least for now) still cars, and drivers.

The analogy to the Agricultural economy at the end is badly flawed: the fundamental technology of all of agriculture has changed radically over the past century. From the heavy equipment (guided by GPS) to the biochemistry and biotechnology, every aspect of agricultural production has been technologically transformed, dramatically. That's where the efficiency yields and productivity gains (which eliminate labor costs) come. The lodging and livery industries remain labor intensive and have not been automated or transformed. The only "secret sauce" is the evasion of regulation and costs of compliance.

I suppose the jury is out on whether or not all of those regulations are still relevant, or if they're merely artificial barriers to entry. But the evidence is mounting that people are starting to remember just why it is you don't want your next door neighbor renting out their apartment like a hotel room, and why it is private homes aren't generally suitable for commercial restaurants. Just because the "micro-entrepreneur" (barf) millenial generation wasn't alive and can't remember a time when the reason for these regulatory requirements were obvious - heck, even something as recent as the ADA were finally achieved - doesn't mean these are figments of the imagination of mean old protectionists.

You did prompt me to spend an enjoyable hour on gawker reading about "sharing economy participants" re-discovering the joys of what life was like in the wonderful libertarian utopia of the pre-progressive-era unregulated US economy when anybody could just hang out a shingle, caveat emptor. You guys are generally much better than this - this was a pretty weak cheerleader piece for a bunch of smoke and mirrors BS from Silicon Valley. When Uber finishes replacing the old "Radio Cab" companies (since the only meaningful difference technologically is their dispatch system), we'll see just how much consumer value there is under the new surge-pricing monopolist. I have a bridge in NYC to show you too. You guys really whiffed on this one. Market-loving fantasy.


Lou Kushner

I just listened to the podcast "Regulate This" as I was walking from my office, through Manhattan, through Times Square, to my 5th floor walk up rental in Hell's Kitchen. For most of the walk I was incensed. Nathan Blecharczyk was very clear about not caring that his company is encouraging the violation of laws. He stated that the laws were 30-100 years old. Implying that because they are old they shouldn't matter, and that because the laws don't support his position, they're somehow "wrong" and need to catch up to his vision.

If this were about a moral issue (eg: gay marriage, religious freedom) that could stand as a valid argument. Blecharczyk's greed is not a moral issue.

As someone who has had to deal with the negative consequences of people using their apartments as rentals in my building, in the apartment abutting my bedroom, I feel strongly that the laws prohibiting short term rentals in NYC are just, fair and reasonable. I should not have to suffer because my neighbor wants to rent out her unit when she's out of town. I should not have to suffer so that Airbnb can profit.

Your assumption in the narrative seems to be that an old model of business is being squeezed by a new model and that the collateral damage is just progress. As someone who is collateral damage, I'm offended.

Dr. Lou Kushner



"I should not have to suffer because my neighbor wants to rent out her unit while she's out of town..."

Funny thing is--it's HER unit, not yours. You live next to other humans, and sometimes, you have to deal with other humans. She rents out the unit because she benefits from the use of her property and space, not because she wants to make someone else rich (and attributing greed to someone who starts a business is ad hominem and not constructive). The people who stay there enter into the agreement because they want a cheaper, more accessible place to stay in the middle of one of the busiest areas in the world. You can't have city life without at least SOME of the downsides. If you are 'suffer'ing so much, put a dollar figure to it and pay your neighbor or the renters to give you what you want. Living in mid-town Manhattan, I'm sure you can spare the few bucks.


The great irony of the regulatory and technocratic class is that their position implies a certain respect and reverence for existing institutions (unions, trade organizations, HOAs) while wanting to somehow uphold respecting property rights of landlords and neighbors while simultaneously voting to disrespect property rights by removing the right to the just desserts of one's labor and property via high regulation and taxation.

The reason we live in cities is to enjoy economies of scale, the amenities, and the proximity to economic activity centers. However, that also comes with disamenities like higher prices, congestion, and yes, sometimes NOISE. What the AirBnB regulation attempts to do is keep all the amenities of city life while removing all the disamenities, which is a regulatory impossibility. Yes, you will get the rowdy crowd every now and again living in or around NYC--but you also made the conscious choice to live in or around NYC, or better yet, to live around other human beings. Whether or not you are zoned 'residential' or zoned to be in a hotel, people sometimes are jerks and make noise.

Welcome to life! It's great to have you.

The question then is whether or not it is a net benefit to (possibly) harm those relatively few unions or trade organizations and the occasional neighbor's slumber while simultaneously creating value and utility for thousands of people. You can't regulate away human nature, selfishness, or opportunism, but you can regulate away innovation and utility quite easily with a few well-placed lobbyists.



How is Airbnb and others any different than Silk road? They all promote illegal activities. Back in mid 1990's during spring break when we couldn't find a place to stay, I had the same idea as Airbnb. But quick search on tenant laws showed that it's illegal to have short term rentals in most cities and that promoting illegal activities serious crime. I guess if you're pasty faced white guy, law doesn't really come after you.