REVIEW #5: Less Regulation, More Reputation!

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The emergence of a sharing economy has shaken things up in many sectors and within the regulatory frameworks. The greatest upheavals are currently being experienced by the taxi and accommodation services, since these are the services where the sharing economy has managed to compete with traditional service providers by (re-)employing idle capital.

Nevertheless, this is just one part of the influence of a sharing economy. The two aforementioned sectors are also characterized by rather extensive public regulation. This regulation is supposed to help mitigate the problem of asymmetrical information between service providers and their customers, i.e. to protect customers from inappropriate behavior on the part of providers.

This is the point where the sharing economy indirectly influences traditional sectors. The sharing economy demonstrates that existing public regulations are not the only alternative to alleviating the problem of asymmetrical information. Another alternative is private regulation provided by sharing economy platforms.

COMMERCIAL BUSINESS REGULATION

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)1, the current GDP of the US 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 gain ex ante. 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 other2. 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 the provider and buyer. Thus, the term “consumer protection” came to be connected with the support of regulation. This approach to regulation will be hereinafter referred to as “public regulation”.

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1 Coffey, B., McLaughlin, P. and Peretto, P. (2016) The Cumulative Cost of Regulations, The Mercatus Center at George Mason University, Available [online]: http://mercatus.org/publication/cumulative-cost-regulations

2 Akerlof, G. A. (1970) “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism”, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970), pp. 488-500.

Robert Chovanculiak
INESS
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