Less Regulation, More Reputation



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Regulation of the commercial business sphere by the government is a relatively hot topic these days. According to a new study by Coffey, McLaughlin and Peretto (2016), the current GDP of the U.S. would be 25% higher if federal regulation had not increased since the 1980s. So why does one need to regulate a voluntary contract between two fully responsible parties at all? If both sides voluntarily agree to a  contract, by definition both sides ex ante gain. Otherwise, such a contract would not be entered into.

Currently, supporters of regulation most often cite the argument of the economic concept of information asymmetry. This is a situation where one party to the contract has an information advantage over the other (Akerlof, 1970). In general, the provider of the product or service is the more informed party who actually knows more about what is being sold than the buyer. Subsequently, as a solution to this “market failure”, the government began to recommend regulation by public authorities that would bring about a  balanced relationship between provider and buyer. Thus, the term “consumer protection” came to be connected with the support of regulation. This approach to regulation will be referred to as “public regulation.”

Examples of such information asymmetry also exist in the areas studied in this paper, including personal transport and accommodation. For example, some taxi drivers in San Francisco at the end of the 19th century were called “nighthawks”. The term was coined because, instead of taking their customers to the location they had requested, they would drive them out to some faraway, abandoned place where they would then demand extra money for not leaving them there. These taxi drivers misused their information advantage with regard to the customer. Public institutions at the time reacted promptly and issued a generally valid public regulation which prohibited a person from working as a  taxi driver without a  special licence. A condition for obtaining the licence was that the driver had to prove to officials that he was “a  law-abiding citizen of good moral character.” (Anderson, 2013).

This approach to regulation – a  monopolistic authority creates generally valid rules for the entire sector – was often the only solution in the last century. And if there was potential space for opportunistic action by service providers, the public authorities would as a rule react by limiting access to the field through licensing requirements, and imposing standards and rules, which were subsequently forced upon the providers and monitored through various inspections. However, this approach to regulation – “public regulation” – had its costs and shortcomings as well. Analytically, one can divide them into three areas: badly set incentives, knowledge problems and high transaction costs. In Part 2 they will be examined more closely. In Part 3, how the same problems are managed in private regulation will be analysed. Part 4 will present empirical analyses of four countries (Slovakia, the Czech Republic, Bulgaria and Lithuania). In the conclusion – Part 5 – specific proposals for public policy-makers on how to react to the arrival of the sharing economy in individual countries will be presented.