Room for Compromise: A Logical Approach to Regulating Airbnb

By Adam Weber and Ariel Burde

Duke University

April 2016
 1

Executive Summary

The newly created sharing economy has revolutionized the way individuals utilize

resources. Since its founding in 2008, Airbnb, a web-based service that connects travelers and

hosts, has given individuals the opportunity to rent out their homes on a short-term basis.

Despite its rapid growth and wide appeal, Airbnbs unique business model has raised challenging

questions on how to regulate the home-sharing industry. This paper focuses on two important

issues the effect of Airbnbs short-term rentals on housing supply and the safety and insurance

ramifications of Airbnbs operations and proposes practical regulatory solutions that

adequately address these considerations without compromising Airbnbs innovative and unique

business model.

In the forthcoming case study, we begin by introducing the sharing economy, outlining

its history, its basic elements, and its major players. We then introduce Airbnb, its history, its

business model, and its key competitors. Next, we discuss the challenges in regulating the

sharing economy, providing some legal and historical context. We go on to describe the long

regulatory battle between Airbnb and New York State officials. These regulatory proceedings

largely inform our ultimate conclusions and policy recommendations. Moving on to our

recommendations, we first outline the key stakeholders involved in Airbnbs business model.

Finally, we explore two important issues in need of a more comprehensive regulatory scheme

and propose policies to address the risk they pose, while preserving the benefits Airbnb delivers.
 2

Introduction to the Sharing Economy

The sharing economy is a system built around the sharing of human and physical

resources. It is made up of web-based peer-to-peer marketplaces. And the internet, further

revolutionized the sharing economy. Communities have shared assets for thousands of years, but

the full extent of the sharing economy did not surface until the age of the Internet. The Internet

reduced transaction costs, which allow for facilitated transmission of information between

parties.1 According to research complied from professors at Princeton University, University of

California, Berkeley, the sharing economy has created people with more opportunities to earn

money in addition to a full-time or part-time job.2 As of 2015, 44 percent of US consumers were

familiar with the sharing economy and 19 percent of the total US adult population engaged in a

sharing economy transaction. The breakdown of the percentage is shown in Figure 1.3

1
Edelman, Benjamin G. and Geradin, Damien, Efficiencies and Regulatory Shortcuts: How Should We Regulate
Companies like Airbnb and Uber? (November 24, 2015). Forthcoming, Stanford Technology Law Review. Web. 8
Feb. 2016.
2 Uber, Airbnb and consequences of the sharing economy: Research roundup - Journalist's Resource. Journalists

Resource (2015). Accessed April 21, 2016. http://journalistsresource.org/studies/economics/business/airbnb-lyft-

uber-bike-share-sharing-economy-research-roundup
3
PwC. The Sharing Economy Consumer Intelligence Series. Last modified 2015.
https://www.pwc.com/us/en/technology/publications/assets/pwc-consumer-intelligence-series-the-sharing-
economy.pdf, 8.
 3

Figure 1

The Internet coupled with new technology and operations defines the sharing economy,

however, the sharing economy also stands on core pillars. The core pillars of the sharing

economy illustrate its benefits.4 These pillars include: digital platforms connecting capacity and

demand; transactions offering access over ownership; collaborative forms of consumption;

branded experiences driving emotional connection; and understanding an economy built on

trust.5 While some of the pillars are not unique to the sharing economy, the pillars allow for the

sharing of more assets. First, platforms that connect capacity and demand by hosting sharing

economy business models. Digital platforms measure available market capacity and connect that

capacity with those who need it.6 For example, Airbnb matches spare rooms and apartments with

travelers in need of lodging.7 Second, transactions offer access instead of ownership. The access

includes renting, lending, subscribing, reselling, swapping, and donating.8 Third, collaborative

forms of consumption. These transactions involve deeper forms of social interactions.9 For

example, Airbnb and Couchsurfing provide travelers with the ability to connect with hosts and

4
Ibid., 15.
5
Ibid., 15.
6
Ibid., 15.
7
Ibid., 15.
8
Ibid., 15.
9
Ibid., 15.
 4

receive personalized travel tips. For lower prices, one can get similar services from luxury hotels

without the high cost of personalization inherent in the traditional economy. 10 Fourth, branded

experiences drive emotional connection to the middleman. Companies need to manage links and

social connections for successful marketing.11 Fifth, the economy is built on trust and

understanding. About one-fifth of American consumers participate in the sharing economy. In

general, 64% of consumers believe government regulation is less important than peer regulation

in the sharing economy.12 The combination of digital platforms connecting capacity and demand;

transactions offering access over ownership; collaborative forms of consumption; branded

experiences driving emotional connection; and understanding an economy built on trust

differentiate the sharing economy from the nondescript trading and bartering that eventually

morphed into todays sharing economy. These pillars create a strong basis for the sharing

economy to exist and grow. Because the sharing economy holds the basis of each of these pillars,

it significantly impacts local, national, and international economies as well.

The sharing economy has emerged as an additional supplier of goods and services to

those already on the market.13 As the size of the sharing economy grows, so does the magnitude

of its economic impacts. Already established businesses are forced to enter the sharing economy

in some way to keep up with the society.14 The sharing economy supplies the outlet for

established companies to recognize and support their customers desire to resell products. 15 This

part of the sharing economy describes e-bay or amazon marketplace, however, Airbnb and Uber,

10
Ibid., 15.
11
Ibid., 15.
12
Ibid., 16.
13
Georgios Zervas, Davide Proserpio, and John Byers. "The rise of the sharing economy: Estimating the impact of
Airbnb on the hotel industry "Boston U. School of Management Research Paper (2013-16) : 2.
http://people.bu.edu/zg/publications/airbnb.pdf
14
Kurt Matzler, Viktoria Veider, and Wolfgang Kathan. "Adapting to the Sharing Economy." MIT Sloan
Management Review 56, no. 2 (Winter, 2015): 71-77.
http://proxy.lib.duke.edu/login?url=http://search.proquest.com/docview/1650910724?accountid=10598.
15
Ibid., 71-77.
 5

for example, deal with a more evolved sharing economy. Airbnb and Uber sell services; they do

not focus on the reselling of products. Indeed, the sharing economy is gaining support and

fundamentally altering how people own and consume property, goods, and services. 16 Network

technologies, social and collaborative software, and consumers changing habits all aid the

growth of the sharing economy. While the shift toward more sustainable modes of consumption

represents a major threat to a number of established business models and revenue streams, it also

offers several pathways where companies can benefit.17 Assisting people in their attempt to share

does not necessarily mean they will not buy your products. As Patagonia and Ikea have

demonstrated, providing support for sharing enhances not only company support but also its

status.18 Ultimately, the sharing economy creates a more efficient use of physical assets in an

evolving form of commerce. The sharing economy takes the philosophies of eBay and craigslist

a step further. Participants do not relinquish ownership rather they share it.

Overview of Airbnb

Airbnb was founded in August 2008, headquartered in San Francisco, CA, and is

privately owned by Brian Chesky, Joe Gebbia, Nathan Blecharczyk, and Laurence Tosi. It is a

website for people to list, find, and rent lodging.It has over 1,500,000 listings in 34,000 cities

and 190 countries.19 Since then it has served over 30 million guests. Such platforms disrupt

traditional hospitality industries by creating new sources of supply.20 Airbnbs business model

includes minimal regulatory controls in most locations where hosts and guests both have to build

16
Ibid., 71-77.
17
Ibid., 72.
18
Ibid., 73.
19
Welcome Home, Winter 2016 https://www.airbnb.com/.
20
Yeung, Ken, 2014 With 8.5m guests, Airbnb seeks to build a more uniform customer experience via its
Hospitality Lab, The Next Web: http://thenextweb.com/insider/2013/09/17/with-8-5m-guests-airbnb-seeks-to-
build-a-more-uniform-customer-experience-with-its-hospitality-lab/.
 6

trust to maximize the likelihood of a successful booking.21 Airbnb has changed the traditional

market for tourism by providing an online marketplace that permits large-scale rental of spaces

from one ordinary person to another. With this peer-to-peer interaction, the Airbnb website

secures its customers identity by ensuring that all members provide photo identification,

authentic phone numbers, and links to Facebook and LinkedIn accounts.22 With its easy access

website, Airbnb is changing the travel economy around the world. A basic over view of how

Airbnb began follows in Figure 2.23

Figure 2

Airbnb runs on a marketplace platform model where it connects hosts and travelers and

enables transactions without owning any rooms itself. Airbnbs business model includes minimal

21
Sangeet Paul Choudary, 2013 The Airbnb Advantage, The Next Web:
http://thenextweb.com/insider/2013/03/10/the-airbnb-advantage-how-to-avoid-competition-and-become-a-multi-
billion-dollar-startup/.
22
Molly Cohen, Arun Sundararajan. "Self-Regulation and Innovation in the Peer-to-Peer Sharing
Economy." University of Chicago Law Review Dialogue 82 (2015): 121
https://lawreview.uchicago.edu/sites/lawreview.uchicago.edu/files/uploads/Dialogue/Sundararajan_Cohen_Dialogue
.pdf.
23
Anna Vital, How Airbnb Started, April 10, 2014, https://burnersxxx.files.wordpress.com/2014/11/how-airbnb-
started.png.
 7

regulatory controls in most locations where hosts and guests both have to build trust to create a

successful booking. Airbnbs reputation and revenues have rapidly grown since it was created.24

Much of its revenue comes from service fees from bookings. Depending on the size of the

reservation, guests are required to pay a six-twelve percent nonrefundable fee.25 A bigger

reservation has lower service fees for guests. With each booking, hosts are charged a 3 percent

fee to cover processing of guest payments.26 When booked, guests pay the service fee unless a

host cancels or retracts from the listing. Furthermore, depending on state or country laws,

customers may need to pay a value-added tax (VAT).27 A VAT is a tax assess on the final sale of

goods and services. Airbnb guests in the European Union, Switzerland, Norway, Iceland, and

South Africa all have a VAT and service fees.28 Thus, Airbnb makes much of its revenue from

booking fees and from host and guest service taxes.

Airbnb exists in a highly popular economic sector: travel. Because traveling includes a

wide variety people for different reasons, Airbnb has competition from the hotel industry and

from startups similar to itself. Hotels, while regulated in alternative ways to Airbnb, hospitality

marks a defining trait of the hotel industry. According to A.K. Sandoval-Strausz in the book

Hotel, Hotels were sophisticated hospitality machines.29 They served the basic purposes as

inns and taverns by providing basic needs including food and shelter. Hospitality transformed

with the operation of hotels. As hospitality transformed the hotel industry, it relates the sharing

economy core pillars as they relate to Airbnb, specifically an emotional connection and trust.

With Airbnb, an emotional connection and foundation of trust between host and guest shapes a

24
Trevir Nath, How Airbnb Makes Money, Investopedia, November 24, 2014,
http://www.investopedia.com/articles/investing/112414/how-airbnb-makes-money.asp.
25
Ibid.
26
Ibid.
27
Ibid.
28
Ibid.
29
A.K. Sandoval-Strausz, House of Strangers - The Transformation of Hospitality and the Everyday Life of the
Hotel in Hotel - An American History (New Haven: Yale University Press, 2007), 142.
 8

guests experience whereas in the hotel industry, hospitality helps shape guests overall

experience. Hotels have a permanent state of coming and going with constant contact between

strangers and the need to establish and maintain contacts and relationships. In the hotel

transformation, they began to [represent] a new paradigm for hospitality 30

Host-guest

relationships became increasingly impersonal which was suited for a nation to become more

mobile. The growing impersonal connection between hotel guests and employees relates to the

purely mobile connection between Airbnb hosts and guests. Many Airbnb guests and hosts never

meet but are connection through Airbnbs website and social media.31 Lastly, over decades, hotel

managers and workers devised elaborate methods for welcoming, accommodating, and serving

the masses of travelers and strangers who passed through and inhabited the nations cities. This

helped establish American urbanism developed by the constant movement of people, goods, and

information. While the hotel industry continues to develop as it redefines hospitality, Airbnb

averages almost 22 percent more guests per night than Hilton Worldwide.32 Regardless of

hospitality factors, Airbnb continues to grow and compete with the hotel industry.

Airbnb is present in 34,000 cities and in 190 counties. In fact, in eight major U.S. cities

Airbnb rates are significantly lower sometimes the rates are as much as 80 dollars per night

or comparable to hotels including Boston, Chicago, Los Angeles, New York, Portland, Seattle,

and Washington D.C. Indeed, Airbnb is also present in London, Sydney, Paris and Toronto.

While Airbnb has a large presence around the world, it has competitors with similar foundations

in the sharing economy. Other sharing economy members similar to Airbnb are: Homeaway,

30
Ibid., 143.

31 Host, Winter 2016 https://www.airbnb.com/host

32
PwC. The Sharing Economy Consumer Intelligence Series. Last modified 2015.
https://www.pwc.com/us/en/technology/publications/assets/pwc-consumer-intelligence-series-the-sharing-
economy.pdf, 14.
 9

Flipkey, Onfinestay, VRBO, and couchsurfing. Homaway is a vacation rental marketplace with
33
more than 1,000,000 vacation rental listings in 190 countries, and has 1588 employees. It

operates through 40 websites in 22 languages.34 Flipkey is similar to Homeaway yet it is part of a

larger company, TripAdvisor. It deals with vacation rentals on Tripadvisor.com.35 Onefinestay,

although a start-up, tries to match the hospitality found in hotels with its home rentals. Guests

and hosts can become members of Onefinestay and list or rent homes in London, New York,

Paris, or Los Angeles.36 VRBO, however, is part of the HomeAway business, the world leader in

vacation rentals with over 950,000 listings. It offers a large selection of properties for varying

budgets.37 Lastly, Couchsurfing is a website where provides a platform for members to surf on

couches by staying as a guest at a hosts home.38 Indeed, these competitors pose a threat to

Airbnb because it is not the only company in the sharing economy that provides the home rental

services. Airbnb is, however, the largest, most popular company to do so.

Airbnb runs in a highly competitive industry vacation and home rentals. Because of

competition from hotels and other startups, Airbnbs ratings are a critical part in accruing more

members and users. According to George Zervas, Davide Proserpio, and John W. Byers in A

First Look at Online Reputation on Airbnb, Where Every Stay is Above Average, the average

Airbnb property rating is about 4.7 stars on a scale from one to five where one is the lowest and

33
HomeAway, Winter 2016 https://www.homeaway.com/?k_clickid=9c00d753-ef43-433b-bd55-
5ef042f669b1&gclid=CjwKEAjw_ci3BRDSvfjortr--DQSJADU8f2jrQyjFYJY1TFd5i0cZXPX8W3EIIlaqySj-
bibWDtDARoCIlLw_wcB.
34
Ibid.
35
About FlipKey, Winter 2016, https://www.flipkey.com/pages/about_us/.
36
FAQs, Winter 2016, http://www.onefinestay.com/faq/ - 10.20.
37
VRBO Part of the HomeAway Family, Winter 2016 https://www.vrbo.com/.
38
Getting Started, Winter 2016 http://www.couchsurfing.com/about/how-it-works/.
 10

five is the highest.39 Additionally, Airbnb [boasts] that 94% of all properties have 4.5 or 5

stars.40 The paper then contrasts Airbnbs rating to that of Trip Advisor. With Trip advisors

average rating of 3.8 stars. Zervas, Proserpio, and Byers come to the conclusion, however, that

Airbnb ratings are more inflated compared to TripAdvisor because either individual versus

individual rating or because Airbnb stays can be compared to vacation rental stays. 41 The

following chart in Figure 3 examines this comparison. 42

Figure 3: Distribution of property ratings on Airbnb and TripAdvisor. The dotted lines show the distribution means.

Furthermore, this discrepancy in the ratings between the two companies is evident in multiple

United States cities as shown in below in Figure 4. 43

39
Georgios Zervas, Davide Proserpio, and John Byers, "A First Look at Online Reputation on Airbnb, Where Every
Stay is Above Average, Boston U. School of Management and Computer Science Department Research
Paper (2013-16) : 3.
40
Ibid., 3.
41
Ibid., 3.
42
Ibid., 15.
43
Ibid., 17.
 11

Figure 4: Distribution of Airbnb and TripAdvisor property ratings by US market

While Airbnb gives an assimilated total property rating, individual ratings are only available on

profiles, thus Airbnb does not report an overall average.44 This makes it difficult for hosts to see

what kind of guest they may be allowing into their home. The elusive individual ratings draw the

success of the individual ratings a question. This is because Airbnb boasts their high property

rating thus the deliberate move in not making a big deal about individual ratings. Airbnb, as a

company, makes it difficult to acquire bad or harmful ratings. Given the short time to give a

rating before the option disappear Airbnb is able to control is customers and hosts. First, if a

customer has a bad experience then they may not not want to immediately report it. This

decision, however, blocks them out from making any type of criticism since Airbnb removes the

rating option after a certain amount of days. Inferring the questionable individual ratings also

stems from multiple posts on Trustpilot about Airbnbs poor customer service. 45 Guests rating

Airbnb as a one star business used words such as fraudulent host, avoid if possible, and

incompetent company to describe their disapproval of the company due to its customer

44
Ibid., 5.
45
Airbnb Reviews, Spring 2016, https://www.trustpilot.com/review/www.airbnb.com.
 12

service.46 While Trustpilot is an opinioned blogsite, people planning trips and vacations do read

it and bad ratings can have significant influence on future rental choices.

Challenges in Regulating the Sharing Economy

In November 2012, Nigel Warren, a resident of the East Village neighborhood of New

York City rented out his apartment for three nights. 47 His landlord was later notified of five

violations of illegal transient hotel laws resulting from Mr. Warrens actions that approached

40,000 dollars in fines.48 Because Mr. Warren was not present during the guests stay and

accepted monetary compensation, he was found to be in violation of the Multiple Dwellings

Law.49 Although Airbnbs terms and conditions did inform hosts of their responsibility to follow

local rules and regulations, many users complained that the company was not explicit enough. 50

Six months after receiving notice of his violation, Mr. Warren, with the help of Airbnbs legal

team, proceeded to combat the governments initial ruling, and succeeded in getting his fine

knocked down to 2,400 dollars.51 The Environmental Control Board found that because Mr.

Warrens roommate was present during the time of the guests occupancy, he was not in

violation of the Multiple Dwellings Law.52 Airbnb followed up by including a more aggressive

46
Ibid.
47
Lieber, Ron. 2012. A Warning for Airbnb Hosts, Who May Be Breaking the Law. The New York Times,
Accessed March 27, 2016.http://www.nytimes.com/2012/12/01/your-money/a-warning-for-airbnb-hosts-who-may-
be-breaking-the-law.html.
48
Ibid.
49
Multiple Dwelling Law, Art. 1, 4.8(a)
50
Lieber, Ron. 2012. A Warning for Airbnb Hosts, Who May Be Breaking the Law. The New York Times,
Accessed March 27, 2016.http://www.nytimes.com/2012/12/01/your-money/a-warning-for-airbnb-hosts-who-may-
be-breaking-the-law.html.
51
Lieber, Ron. 2013. A $2,400 Fine for an Airbnb Host. The New York Times Bucks Blog. Accessed March 1,
2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.
52
Brustein, Joshua. 2013. Why Airbnbs Legal Victory Isnt the End of its Problems. Bloomberg. Accessed
March 1, 2016. http://www.bloomberg.com/news/articles/2013-10-01/why-airbnbs-legal-victory-isnt-the-end-of-its-
problems-in-new-york
 13

statement in their terms and conditions regarding the responsibility of their hosts to understand

the legality of their actions.53

Despite Mr. Warrens victory, the highly publicized case opened the floodgates for

complaints and legal maneuvers against Airbnbs operations. New York Attorney General Eric

Schneiderman announced that his office would look for a path around the protective clause of

Section 230, which transferred the legal liability from Airbnb to their individual hosts.54 New

York State Senator Liz Krueger, who authored the Multiple Dwellings Law, claimed that many

Airbnb listings in New York, sending a clear warning to Airbnb and its users.55

The rapid growth of the sharing economy has transformed the way individuals utilize

resources, leading to substantial efficiency gains. Through the services provided by disruptive

companies like Airbnb, Uber, and others, consumers can now make fuller use of their most

expensive resources, like homes or automobiles. The decentralized structure of the sharing

economy has drastically lowered barriers to entry in previously highly guarded industries, such

as the hospitality and transportation industry. Individuals seeking new ways to earn money can

easily become suppliers on these sharing services by offering up their resources on a temporary

basis.56 Consumers also benefit from the increased supply of these resources through lower

prices.

The unprecedented business model employed by companies like Airbnb, Uber, and

TaskRabbit, and other shared-services companies, has raised serious challenges for regulators.

53
Lieber, Ron. 2013. A $2,400 Fine for an Airbnb Host. The New York Times Bucks Blog. Accessed March 1,
2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.
54
Fickenscher, Lisa. 2013. Hotels Girding for a Fight against Airbnb.Crains New York Business. Accessed
March 6, 2016. http://www.crainsnewyork.com/article/20130819/HOSPITALITY_TOURISM/130819909/hotels-
girding-for-a-fight-against-airbnb.
55
Brustein, Joshua. 2013. Why Airbnbs Legal Victory Isnt the End of its Problems. Bloomberg. Accessed
March 1, 2016. http://www.bloomberg.com/news/articles/2013-10-01/why-airbnbs-legal-victory-isnt-the-end-of-its-
problems-in-new-york
56
Geron, Tomio. Airbnb And The Unstoppable Rise Of The Share Economy. 2013. Forbes. Accessed March
6.http://www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/.
 14

Many of the laws regulators have been attempting to apply to sharing economy companies were

written by lawmakers who did not foresee the development of this new type of industry. Prior to

the rise of the sharing economy, regulations were divided into two clear-cut categories: those

intended for individual citizens and those intended for businesses. The sharing economy has

created a third category: people as businesses.57 Furthermore, because many of the industries

prone to disruption by the sharing economy are regulated on a state or local level, a uniform

framework has yet to be established. Rather, different states and localities are experimenting

with different approaches.

This decentralized regulatory approach has resulted in varying ideas on where the line

between consumer choice and consumer protection should be. The sharing economy has

benefitted consumers with expanded choice and lower prices. However, the unregulated nature

of the industry poses public safety threats. The weight that lawmakers grant to each of these

factors should determine the extent of the regulation imposed on the sharing economy. Of

course, one cannot ignore the powerful voices of the special interest groups occupying the

position of the incumbents in the industries that sharing economy companies threaten to

disrupt.58 This presents another important challenge regulators must overcome in devising an

effective set of supervisory policies.

While most sharing economy regulation is enforced on the state and local level,

developing Internet-based peer-to-peer companies have relied on an important federal statute

to circumvent prohibitive state regulations. Section 230 of the Telecommunications Act

(Section 230) offers Internet based companies legal protection from the posts of their users.

57
Kaplan, Roberta, and Michael Nadler. "Airbnb: A Case Study in Occupancy Regulation and Taxation." University
of Chicago Law Review 82, no. 103 (2015): 103-15. Accessed March 27, 2016. Hein Online.
58
Fickenscher, Lisa. 2013. Hotels Girding for a Fight against Airbnb.Crains New York Business. Accessed
March 6, 2016. http://www.crainsnewyork.com/article/20130819/HOSPITALITY_TOURISM/130819909/hotels-
girding-for-a-fight-against-airbnb.
 15

The law states, No provider of user of an interactive computer service shall be treated as the

publisher of speaker of any information provided by another information content provider. That

is, sharing economy website like Airbnb and Uber that consist of user posts cannot be prosecuted

for content that violates a state law, because the company did not directly publish that content.59

Section 230 does provide an exemption for federal criminal law violations, under which the

companies would be liable.60

Section 230 was enacted in 1996, when the digital revolution was still in its earliest

stages of development. The law served as a crucial source of protection for the earliest Internet

companies seeking to disrupt traditional marketplaces. Since the laws adoption, companies like

eBay, Wikipedia, and eHarmony have relied on Section 230 for protection from the posts of its

users.61 Similarly, sharing economy companies like Airbnb and Uber seeking to solidify market

share against established incumbents rely heavily on the protections outlined in Section 230.

State regulators, most notably the National Association of Attorneys General (NAAG),

have been lobbying Congress to provide an additional exemption for state criminal law

violations. Essentially, this small change in the language would open up Internet company

executives to criminal liability for their users violations of state laws. This type of regulatory

scheme exists in Europe, where Internet companies are responsible for user-generated content.62

The NAAG claims that the expansion of this provision to encompass state laws will allow state

prosecutors to investigate child trafficking and prostitution activities currently protected by

59
47 U.S. Code 230 Protection for Private Blocking and Screening of Offensive Material
60
Goldman, Eric. Why The State Attorneys Generals Assault On Internet Immunity Is A Terrible Idea. June
2013. Forbes. Accessed March 6, 2016. http://www.forbes.com/sites/ericgoldman/2013/06/27/why-the-state-
attorneys-generals-assault-on-internet-immunity-is-a-terrible-idea/.
61
McNamara, Brittany. "Airbnb: A Not-So-Safe Resting Place." Colorado Technology Law Journal 13, no. 1
(2015): 149-70. Accessed March 27, 2016. Hein Online.
62
Goldman, Eric. The State Attorneys General Want to Eviscerate a Key Internet Immunity. June 2013. Forbes.
Accessed March 25, 2016. http://www.forbes.com/sites/ericgoldman/2013/06/26/the-state-attorneys-general-want-
to-eviscerate-a-key-internet-immunity/#377703a81be4
 16

Section 230. However, sharing economy companies fear that the NAAG amendment would

result in more prohibitive state regulations against their services.63 Whether the NAAG

amendment will gain traction in Congress remains to be seen. As it stands now, Section 230

protects Internet companies from criminal prosecution from user-generated violations. Thus,

regulators have been forced to pursue individual suppliers of the sharing economy goods and

services.

Case Study of Airbnb in New York City:

Why New York City?

Because the regulations governing Airbnb vary based on locality, it would be difficult to

analyze each and every regulatory approach. We chose to focus the bulk of our case study on the

New York City market for the following reasons. Airbnb has an established presence in New

York. Between 2012 and 2013, over 400,000 visitors used Airbnbs services in New York City,

and New York City is currently Airbnbs largest market.64 65 Secondly, Airbnb had a long, highly

publicized regulatory battle with New York Attorney General Eric Schneiderman. Because New

York took a relatively firm stance against Airbnb, the protracted battle revealed many of the

arguments for and against regulations on sharing economy companies like Airbnb.

Overview of Relevant NYC Regulations:

63
McNamara, Brittany. "Airbnb: A Not-So-Safe Resting Place." Colorado Technology Law Journal 13, no. 1
(2015): 149-70. Accessed March 27, 2016. Hein Online; Also see Goldman, Eric. Why The State Attorneys
Generals Assault On Internet Immunity Is A Terrible Idea. June 2013. Forbes. Accessed March 6, 2016.
http://www.forbes.com/sites/ericgoldman/2013/06/27/why-the-state-attorneys-generals-assault-on-internet-
immunity-is-a-terrible-idea/.
64
Airbnb Economic Impact. 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9
http://blog.airbnb.com/economic-impact-airbnb/.
65
Why Is New York City Cracking down on Airbnb? 2016. PBS NewsHour. Accessed March
28.http://www.pbs.org/newshour/bb/will-new-york-city-shut-airbnb-2/.
 17

In New York City, the Multiple Dwellings Law governs the space Airbnb occupies.66 The

Multiple Dwellings Law outlines the definitions of the different classes of apartment-style

residences in New York, along with the rules and regulations pertaining to each. 67 A Class A

residence is defined as a multiple dwelling that is occupied for permanent residence purposes

and includes the following

[T]enements, flat houses, maisonette apartments, apartment houses, apartment hotels,

bachelor apartments, studio apartments, duplex apartments, kitchenette apartments,
garden-type maisonette dwelling projects, and all other multiple dwellings except class B
multiple dwellings.68

The law defines a permanent residence a dwelling unit by the same natural person or family

for thirty consecutive days or more.69 A Class B multiple dwelling is one which is occupied,

as a rule transiently, as the more or less temporary abode of individuals or families who are

lodged with or without meals, and includes the following:

[H]otels, lodging houses, rooming houses, boarding houses, boarding schools, furnished
room houses, lodgings, clubhouses, college and school dormitories and dwellings
designed as private dwellings but occupied by one or two families with five or more
transient boarders, roomers, or lodgers in one household.70

For Class A dwellings, the law allows for the occupancy of such dwelling unit for fewer than

thirty consecutive days by other natural persons within the household of the permanent occupant

such as house guests or lawful boarders, roomers, or lodgers.71 Additionally, the law permits

incidental and occasional occupancy of such dwelling unit for fewer than thirty consecutive

days by other natural persons when the permanent occupants are temporarily absent for personal

reasonsprovided that there is no monetary compensation paid to the permanent occupants.72

66
Multiple Dwelling Law, Art. 1, 4.8(a)
67
Ibid.
68
Ibid.
69
Ibid.
70
Multiple Dwelling Law, Art. 1, 4.9
71
Multiple Dwelling Law, Art. 1, 4.8(a)
72
Ibid.
 18

That is, it is illegal under this provision for a permanent resident to receive payment to rent out

their apartment for less than thirty days, if the permanent resident is absent. This presents a major

problem for many Airbnb hosts, as will be detailed in the following section.

New York City also levies a hotel room occupancy tax of 5.875 percent, which amounts

to about 1 percent of the citys total tax revenue.73 New York Tax Law defines a hotel as a

building or portion of it which is regularly used and kept open as such for the lodging of guests.

The term hotel includes an apartment hotel, a motel, boarding house, or club, whether or not

meals are served.74 There does, however, exist an important exemption for individuals who rent

out their home on fewer than three occasions or for not more than 14 cumulative days during any

12-month period.75 While there is some controversy surrounding whether Airbnb listings should

be subject to the tax, the NYC Department of Finance declared them exempt from the tax.76

Despite this ruling, Airbnb has publicly offered to pay their fair share of taxes, provided that

lower-income hosts remain exempt.77

The History of Airbnb in New York:

In October 2013, Eric Schneiderman began his investigation of Airbnbs presence in New

York City, subpoenaing data on 15,000 Airbnb users.78 This marked the beginning of the highly

adversarial battle between Airbnb and AG Schneiderman. Shortly after receiving

73
Kaplan, Roberta A. and Nadler, Michael L."Airbnb: A Case Study in Occupancy Regulation and Taxation."
University of Chicago Law Review Dialogue 82.103 (2015): 103-104. Hein Online. Web. 10 Feb. 2016.
74
New York Tax Law 110
75
Saunders, Laura. 2015. Airbnb Income May Be Tax-FreeBut Theres a Catch. Wall Street Journal, Accessed:
March 28, 2016 sec. Markets.http://www.wsj.com/articles/popular-tax-break-can-lead-to-filing-hassles-1427982638.
76
Kaplan, Roberta A. and Nadler, Michael L."Airbnb: A Case Study in Occupancy Regulation and Taxation."
University of Chicago Law Review Dialogue 82.103 (2015): 109. Hein Online. Web. 10 Feb. 2016.
77
Chesky, Brian, Oct 3, 2013,Who We Are, What We Stand For, Airbnb, Accessed March 27,
2016. http://blog.airbnb.com/who-we-are
78
Bloomberg News. 2013. Schneiderman Investigating Airbnb Users. Crains New York Business. Accessed
March 2016 http://www.crainsnewyork.com/article/20131007/REAL_ESTATE/131009911/schneiderman-
investigating-airbnb-users.
 19

Schneidermans subpoena, Airbnb announced its plans to fight to protect the privacy of its

users.79 Matt Mittenthal, a spokesman for AG Schneiderman, stated that the purpose of the

investigation was to recover millions of dollars in unpaid taxes and to stop the abuse of

Airbnbs site by operators of illegal hotels.80 In the same statement, Mittenthal accused Airbnb

of standing up for highly profitable, illegal businesses that make a huge chunk of its corporate

revenue.81

Airbnbs head of global public policy, David Hantman, responded to the Attorney

Generals accusations of protecting illegal hoteliers by asserting that almost 90 percent of

[Airbnbs] hosts have only one listing at its the home they live in. 82 Airbnb publicized the story

of Tara Robertson, a widowed Manhattan resident who used Airbnbs website to make extra

money to cover her expensive medical bills.83 Ms. Richardson, in a video launched by Airbnb,

declared that New York officials were stepping over dimes to pick up nickels, alluding to their

emphasis on hotel tax dollars and disregard of the overall economic prosperity Airbnb brings to

New York.84 Airbnbs users also revealed their opposition to AG Schneidermans investigation,

gaining nearly 20,000 signatures on a petition asking the state senate to revise the Multiple

Dwellings Law in Airbnbs favor.85 Because the law, written before Airbnb became popular in

79
Ibid.
80
Harris, Elizabeth A. 2013. The Airbnb Economy in New York: Lucrative but Often Illegal. The New York
Times, Accessed March 1, 2016.http://www.nytimes.com/2013/11/05/nyregion/the-airbnb-economy-in-new-york-
lucrative-but-often-unlawful.html.
81
Ibid.
82
Ibid.
83
Ibid.
84
Whitehouse, Kaja. 2013. Attorney Generals NYC Battle with Airbnb Targets Widowed Grandma. New York
Post. Accessed March 1, 2016. http://nypost.com/2013/11/13/ny-attorney-general-targets-widow-in-airbnb-battle/.
85
Kerr, Dara. 2013. Airbnb Host Creates Petition to Confront New York Lawmakers. CNET. Accessed March 6.
http://www.cnet.com/news/airbnb-host-creates-petition-to-confront-new-york-lawmakers/.
 20

New York, had the intent of combatting slumlords operating illegal hotels, Airbnb and its

supporters argued that the legislature should create a exemption for Airbnb hosts.86

Airbnb filed a motion to quash the Attorney Generals subpoena, arguing that it was

without factual basis, overbroad and unduly burdensome.87 In response, the Attorney Generals

Office submitted the affidavit of Sumanta Ray, Director of Research and Analysis with the

Investor Protection Bureau of the New York State Attorney General. 88 Rays findings indicated

that while a majority (88 percent) of Airbnb hosts listed only one property, the 12 percent that

listed more than one accounted for 30 percent of the listings on Airbnbs site.89 Ray also found

that a majority of hosts rented their apartments for less than thirty days, in clear violation of the

Multiple Dwellings Law.90 Based on this information, AG Schneiderman argued that the states

investigation was more than a mere fishing expedition, as Airbnb had previously asserted.91

In May 2014, the Supreme Court of New York sustained Airbnbs claim that states

subpoena was too broad in certain areas.92 On the tax issue, the Court declared many of the

individuals for whom the Attorney Generals Office was requesting data may be exempt from the

hotel occupancy tax, since their apartments are rented on fewer than three occasions or for not

more than 14 days in the aggregate during any four consecutive quarters or any 12-month

86
Ibid.
87
Decision and Order, Airbnb v. Schneiderman, 989 N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at
http://www.documentcloud.org/documents/1159527-airbnb-new-york-decision.html#document/p9
88
Affidavit of Sumanta Ray in Opposition to Airbnb, Incs Motion to Quash and in Support of the Attorney
Generals Cross-Motion to Compel Responses to an Investigatory Subpoena, Airbnb v. Schneiderman, 989
N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at http://www.documentcloud.org/documents/1145999-new-
york-attorney-general-analysis-of-airbnb.html#document/p3.
89
Ibid.
90
Ibid.
91
Watson, Bruce. 2013. Airbnbs Legal Troubles: The Tip of the Iceberg for the Sharing Economy? The
Guardian, sec. Guardian Sustainable Business. Accessed March 1, 2016. http://www.theguardian.com/sustainable-
business/airbnb-legal-trouble-sharing-economy
92
Decision and Order, Airbnb v. Schneiderman, 989 N.Y.S.2d 786 (Sup. Ct. 2014) (No. 5393-13), available at
http://www.documentcloud.org/documents/1159527-airbnb-new-york-decision.html#document/p9
 21

period.93 Additionally, Multiple Dwellings Law only applies to cities with a population of

greater than 325,000 persons, but the original subpoena did not limit its investigation to New

York City Airbnb hosts. In this respect, the subpoena was too broad. 94 However, the Court ruled

in favor of AG Schneidermans office with regard to Airbnbs argument that the subpoena was

overly burdensome.95 Ultimately, the gave the Attorney General the opportunity to narrow down

the subpoenas to those hosts who are not exempt from the tax and to those who are violating the

Multiple Dwellings Law. In July 2014, Airbnb agreed to provide the Attorney Generals office

with the data of 124 hosts who may be flagrantly misusing [Airbnbs] platform.96 Additionally,

Airbnb provided anonymized data for approximately 16,000 hosts to the Attorney Generals

office.97

In October 2014, Attorney General Schneiderman released a comprehensive report

outlining the use of Airbnb in New York City. The report contained data on Airbnb listings from

2010 to 2014 and found that 72 percent of Airbnb units violating the Multiple Dwellings Law, as

depicted in Figure 5.98

93
Ibid.
94
Ibid.
95
Ibid.
96
Bort, Julie. 2014. Airbnb: 124 New York Airbnb Hosts May Be Flagrantly Misusing Our Platform.. Accessed
March 6, 2016.http://www.businessinsider.com/airbnb-gives-ag-info-on-124-ny-hosts-2014-8.
97
Burnett, Stephanie. 2014. Airbnb Hands Over Data on 124 Hosts in New York City to the Authorities. Time,
Accessed March 6, 2016.http://time.com/3180103/airbnb-hands-over-data-on-124-hosts-in-new-york-city-to-the-
authorities/.
98
United States. New York State Office of the Attorney General. Airbnb in the City. By Eric T. Schneiderman.
2014.
 22

Figure 5: Data on short-term Airbnb rentals violating NY laws

AG Schneidermans report also calculated the hotel occupancy tax liability from these Airbnb

listings roughly equal to 33 million over the four and a half year span.99 The report also classified

Airbnbs commercial users as hosts who rented three or more units.100 Of the Airbnb hosts

analyzed, Schneiderman found that 6 percent fell into this category. However, these 6 percent of

hosts accounted for 37 percent of Airbnbs revenue.101 Following this discovery, Airbnb publicly

stated their efforts to restrict the activity of these commercial users.102

Schneidermans report did not mark the end of the legal battle between Airbnb and New

York officials. Both the Attorney Generals office and the New York City Mayors Office are

fighting hard to shut down illegal hotels resulting from Airbnbs services and to collect hotel

occupancy taxes. In November 2015, New York City Mayor Bill de Blasio appropriated 10

million dollars to the Mayors Office of Special Enforcement to investigate and ultimately

99
Ibid., 9.
100
Ibid., 10.
101
Ibid., 10.
102
Ibid., 11.
 23

eliminate violations of occupancy law resulting from Airbnbs services. 103 Individual

crackdowns continue to occur throughout the five boroughs. In February 2016, the Mayors

Office of Special Enforcement raided a property in Brooklyn renting out rooms for as low as 31

dollars per night.104 As long as Section 230 remains unchanged, New York officials will have to

continue pursuing individual Airbnb hosts for state law violations.105 Eliminating illegal hotels

one host at a time costs both time and resources. Before long, New York, along with many other

states and localities, will have to develop a comprehensive set of policies to deal with the issues

Airbnb presents. The following section outlines a logical policy approach that promotes Airbnbs

positive impacts on hosts, guests, and local businesses, while mitigating the risks the company

poses.

Airbnbs Stakeholders

Stakeholders involved in the sharing economy, specifically in rental companies like

Airbnb, range from renters and guests to the Federal government. Given the complicated nature

of renting out homes in compliance with city and state regulations, the hierarchical structure

below shows the connections between each actor.

103
Fermino, Jennifer. 2015. NYC Will Spend $10M to Crack down on Illegal Hotels. NY Daily News. Accessed
March 30, 2016. http://www.nydailynews.com/new-york/nyc-spend-10m-crack-illegal-hotels-article-1.2436047.
104
Mashayekhi, Rey. 2016. City Crackdown on Airbnb, Illegal Hotels Hits East Williamsburg. The Real Deal New
York. Accessed March 27, 2016 http://therealdeal.com/2016/02/29/city-crackdown-on-airbnb-illegal-hotels-hits-
east-williamsburg/.
105
47 U.S. Code 230 Protection for Private Blocking and Screening of Offensive Material
 24

The Federal
Government

Insurance States

Governors
Landlords
Airbnb

Host
Local
Businesses
Neighbors

Guests

Figure 6_: Stakeholder hierarchy Chart

According to this structure, the federal government sits on top. Directly under the federal

government lies the stateslie the states. Between the states and the federal governments

overarching rules and regulations guide a broad implementation of Airbnb counties and cities.

From these regulations, governors, landlords, and Airbnb set their own regulations to influence

Airbnb in either a positive or negative direction. Of course, Airbnb wants to positively influence

its position in cities and in its terms and conditions, informs hosts of their responsibility to follow

local rules and regulations. Indeed, the compliance between hosts and guests and local

governance does not always work smoothly and in some of these cases, Airbnb becomes legally

involved as in Nigel Warrens court case.106 The involvement of different parties including the

state, landlords, and Airbnb influence the relationships between local businesses, hosts,

neighbors, and guests. The tier under with local business, hosts, and neighbors are the

stakeholders who are directly affected as well as the next level of hosts, guests, and neighbors

Lieber, Ron. 2013. A $2,400 Fine for an Airbnb Host. The New York Times Bucks Blog. Accessed March 1,
106

2016.http://bucks.blogs.nytimes.com/2013/05/21/a-2400-fine-for-an-airbnb-host/.
 25

complicated Nigel Warrens story. The connections between each actor, for example, hosts

relationships with their neighbors and landlord and guests respecting the habits of neighbors and

community surrounding the hosts home creates intricate patterns between the stakeholders.

Ultimately, each actor influences the others. Local business owners either boutique or restaurant

owners, for example, want to benefit from guests dining or buying items. The guests help

businesses like these flourish. In turn, however, it is assumed that guests comply with

neighborhood and landlord regulations.

How Should Airbnb Be Regulated?

Airbnb brings benefits to many different groups of people. In New York, 62 percent of

Airbnb hosts claimed that the money earned from this service helped them stay in their homes.107

Guests take advantage of Airbnbs lower prices by extending their stays, thus generating revenue

for local businesses.108 Airbnb does, however, present certain risks, and governments should

develop practical and comprehensive policy approaches to address them. But governments

should be careful not to stifle the benefits that Airbnb brings. This section will outline the

specific risks posed by Airbnb and recommend a logical regulatory approach that would strike a

balance between protecting public welfare and promoting innovation. These policy

recommendations are targeted at the state and local policymakers that largely handle zoning

regulations. Local and state policymakers are composed of two groups: the elected officials (i.e.,

legislative and executive branches) and the unelected bureaucratic agencies who enforce the

laws. A successful regulatory framework depends on both the legislatures passing of the law

and the agencies enforcement of it. Certain recommendations will target Airbnb and other

107
Airbnb Economic Impact. 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9
http://blog.airbnb.com/economic-impact-airbnb/.
108
Ibid.
 26

stakeholders who are affected by the companys presence. As will be shown, many of the issues

need not legal regulations to be resolved, but rather active participation and compromise by

relevant stakeholders.

Effects of Airbnb on the Housing Marketof Short-Term Airbnb Rentals on Housing Supply:

A major concern of local government officials is the effect of Airbnb on the supply of

affordable long-term housing. Because short-term rentals tend to be more lucrative than long-

term rentals, officials fear that Airbnbs presence will entice landlords to increase short-term

rentals, thereby limiting the supply of affordable long-term housing. Lower supply translates to

higher prices. Research on the Los Angeles housing market describes how the presence of

Airbnb and the growth in short-term rentals has effectively driven up rent prices, particularly in

gentrifying neighborhoods.109 The crisis is particularly severe in cities like Los Angeles, where

vacancy rates are near zero.110 When long-term residential options are converted into short-term

rentals and effectively taken off the market, it causes a sudden supply shock. 111 The nature of the

housing market is such that increasing supply requires substantial investments in terms of both

time and capital, exacerbating the effects of the supply shock.112 In Los Angeles, the wealthiest

neighborhoods see the greatest Airbnb short-term rental activity.113 The supply shock and

subsequent rent spike as described above forces middle-income renters out of these

neighborhoods into adjacent lower-income ones.114 The influx of middle-income renters into

gentrifying neighborhoods, prices out the lower-income individuals who previously occupied

109
Lee, Dayne. How Airbnb Short-Term Rentals Exacerbate Los Angeless Affordable Housing Crisis: Analysis
and Policy Recommendations. Harv. L. & Poly Rev. 10(2016): 229-255
110
Ibid., 237.
111
Ibid., 237.
112
Ibid., 230.
113
Ibid., 240.
114
Ibid., 240.
 27

those areas.115 In one year, rents increased by over 7 percent in gentrifying neighborhoods in Los

Angeles, and by over 9 percent over the course of two years.116 New York officials fear a similar

outcome.117

According to Attorney General Eric Schneidermans report on Airbnb in New York City,

almost 2,000 individual units were rented out for short-term use for at least six months of 2013,

deeming them unavailable for long-term purposes.118 Furthermore, the proportion of short-term

rentals in New York increased each year from 2010 to 2013, as shown in Figure 76.119 As shown

in the charts, the share of rentals used for short-term purposes for six months or more increased

from 18 percent of rentals in 2010 to 38 percent in 2013.120

Figure 76: Share of Host Revenue from Short-Term Rentals

115
Ibid., 240.
116
Ibid., 242.
117
United States. New York State Office of the Attorney General. Airbnb in the City. By Eric T. Schneiderman.
2014. p. 12.
118
Ibid., 12.
119
Ibid., 13.
120
Ibid., 13.
 28

The geographic distribution of these short-term rentals has been another cause for

concern for city and state officials. In New York, many of the short-term Airbnb listings fall

outside the highly commercialized areas like Times Square. Rather these rentals are often in

residential neighborhoods like SoHo and Williamsburg, Brooklyn.121 Like the Los Angeles case,

middle-income renters may become forced out of these neighborhoods into cheaper areas. The

gentrification of those neighborhoods will then drive up housing prices for New Yorks lowest-

income renters.122

The data presented in the Attorney Generals report on Airbnb in New York show that

short-term rentals resulting from Airbnbs services are in fact increasing.123 However, the

increase in the number of short-term rentals may not necessarily translate to the limited supply of

long-term housing. Individual tenants renting out their own apartments for a few days at a time

when they are out of town pose little threat to the long-term housing market. In New York, 87

percent of hosts fall into this category. Those who pose a formidable threat to the supply of

affordable long-term housing are the hosts who list multiple properties on Airbnb, defined as

commercial users by Attorney General Schneidermans office.124 In New York, these

commercial users accounted for only 6 percent of hosts, but 36 percent of all reservations

made between 2010 and 2014.125

An effective policy approach would target these types of users and limit the number of

listings they can put on Airbnbs site. Airbnb should cooperate with government officials in

121
Airbnb Economic Impact. 2016. The Airbnb Blog - Belong Anywhere. Accessed March 9
http://blog.airbnb.com/economic-impact-airbnb/; also see United States. New York State Office of the Attorney
General. Airbnb in the City. By Eric T. Schneiderman. 2014. pp. 15-16.
122
Lee, Dayne. How Airbnb Short-Term Rentals Exacerbate Los Angeless Affordable Housing Crisis: Analysis
and Policy Recommendations. Harv. L. & Poly Rev. 10(2016): 229-255
123
United States. New York State Office of the Attorney General. Airbnb in the City. By Eric T. Schneiderman.
2014.
124
Ibid., 10.
125
Ibid., 10.
 29

limiting these commercial users, as they have stated they would in the past, for several

reasons.126 First, affordable housing is one of Airbnbs core values.127 Airbnb was founded in

2007 by individuals seeking to make housing more affordable in San Francisco. 128 Second,

without a new set of policies written with Airbnb in mind, city and state officials, like those in

New York, will continue to pursue individual hosts.129 The experiences of Nigel Warren will

become far too common, except Airbnb will not realistically be able to step in on behalf of every

host facing fines and penalties. Individual hosts will soon become afraid to list their apartments

on the website and Airbnbs entire trust-based business model will collapse. Airbnb should work

with governments to include provisions in laws like the Multiple Dwellings Law allowing for

individuals to rent out their own apartments on sites like Airbnb. In return, Airbnb should limit

the number of listings an individual can place on the site. While this might hurt Airbnbs revenue

stream in the short term, it is a logical way for the company to preserve its business model and its

operations as a whole.130

Another feasible alternative, as proposed by Dayne Lee, would involve a community

benefits agreement (CBA) model, where key stakeholders collaborate and compromise in order

to solve the issue of affordable housing supply.131 Under this model, Airbnb and property

developers looking to build and capitalize off of short-term rentals could work with New Yorks

government to prevent an affordable housing crisis. Lee notes the possibility of property owners

126
Ibid., 11.
127
Chesky, Brian. 2013. Who We Are, What We Stand for. The Airbnb Blog - Belong Anywhere. Accessed March
30, 2016. http://blog.airbnb.com/who-we-are/.
128
Ibid.
129
Fermino, Jennifer. 2015. NYC Will Spend $10M to Crack down on Illegal Hotels. NY Daily News. Accessed
March 30, 2016. http://www.nydailynews.com/new-york/nyc-spend-10m-crack-illegal-hotels-article-1.2436047.
130
Between 2010 and 2014, commercial rental properties accounted for 37 percent of Airbnbs revenue in New
York City; see United States. New York State Office of the Attorney General. Airbnb in the City. By Eric T.
Schneiderman. 2014, p. 10.
131
Lee, Dayne. How Airbnb Short-Term Rentals Exacerbate Los Angeless Affordable Housing Crisis: Analysis
and Policy Recommendations. Harv. L. & Poly Rev. 10(2016): 229-255
 30

or developers setting aside a set amount of units in newly constructed apartment buildings as

affordable long-term housing options, while reserving others for short-term renters.132

Governments and developers, under this proposal, could work together to expand the total supply

of housing, allowing room for both short-term renters and long-term residents. This plan also

aligns well with Airbnbs core values of promoting affordable housing. Airbnb would capitalize

off of the public relations opportunities. This plan provides a feasible way for individuals to take

advantage of Airbnbs unique business model, while making housing more affordable for low-

income renters.

Insurance and Safety:

The issue of safety has come up time and time again in the debate on how to regulate

Airbnb and other sharing economy companies. From the point of view of a host, the idea of

having a stranger stay unaccompanied in your apartment may seem strange. Equally strange is

the idea of actually sleeping in a strangers bed. People worried about theft, destruction of

property, or even kidnapping may argue that staying in a hotel is much safer than staying in an

Airbnb apartment. Stories of foul play in Airbnb rentals have become highly publicized. For

example, in 2014, a resident of Glendale, California using Airbnb to rent out his home as a

party house caught much news coverage.133 While these incidents are few and far between and

do not characterize the vast majority of Airbnb experiences, they need to be addressed. Failure to

do so will not only compromise public safety, but will also undermine Airbnbs business model.

Airbnb largely relies on self-regulation between its users in order to ensure safety and

reliability. All users must make a profile and both hosts and guests receive public ratings and

132
Ibid., 251.
133
Levine, Brittany. 2014. Airbnb Party House in Glendale Shut down after Police Visits. Latimes.com.
Accessed March 31, 2016. http://www.latimes.com/local/lanow/la-me-ln-airbnb-party-house-glendale-20140106-
story.html.
 31

comments from past rental experiences. Most importantly, hosts have the right to deny potential

guests if their ratings are not up to snuff. In order to increase the reliability of this internal review

system, Airbnb enacted several important changes to the system in July 2014.134 For instance, in

order to prevent retaliatory actions in response to a bad rating, hosts and guests receive notice of

their ratings at the same time.135 The company has also shortened its review period to guarantee

that experiences are fresh in the minds of the rating party. 136 Lastly, Airbnbs new review system

asks guests to specifically share one thing they loved about the experience and one thing they

wish to see improved.137 All of these reforms serve to provide honest and informative feedback

on Airbnb listings, ultimately improving the safety of users.

Self-regulation certainly has its benefits. The marginal costs of implementation and

enforcement are low, and Airbnbs growth and success speaks to the merits of self-regulation. Its

business model is based on trust between its users; if users feel unsafe, they will elect not to use

the service. That is why, according to Steve Webb of Turo, a car-sharing service, sharing

economy companies have an incentive to adhere to safety regulations even stricter than those

imposed by the government.138 Without building a high level of consumer trust, sharing

economy companies like Airbnb and Turo cannot seize market share from established

incumbents. However, Airbnbs success relies on more than trust between hosts and guests.

There are other stakeholders on whom Airbnbs business model depends, namely insurance

companies. Companies providing renters or homeowners insurance take on added risk when

homes or apartments they insure are being rented on sites like Airbnb. Airbnb has attempted to

134
Building Trust with a New Review System - Airbnb. 2014. The Airbnb Blog - Belong Anywhere. Accessed
March 1, 2016. http://blog.airbnb.com/building-trust-new-review-system/.
135
Ibid.
136
Ibid.
137
Ibid.
138
Kuo, John. 2013. How Should Government Regulate The Sharing Economy?NerdWallet. Accessed March 27,
2016. https://www.nerdwallet.com/blog/investing/government-regulate-sharing-economy/.
 32

address this issue through its Host Protection Insurance Plan, which covers up to 1 million

dollars in third-party claims of injury or property damage.139 Formerly, Airbnb only offered a

Host Guarantee policy, which acted as a supplement to primary homeowners or renters

insurance.140 The Host Protection Insurance plan was intended to be a more comprehensive

policy, addressing the gaps in the Host Guarantee policy. 141 However, the Host Protection

Insurance policy has several important flaws. For example, a closer look at the Host Protection

Insurance indicates that all claims must be filed within 14 days, hosts must be in compliance

with all other Airbnb terms in order to receive a reimbursement, and hosts must attempt to

resolve the conflict with the guest before filing a claim, to name a few.142 Furthermore, and

perhaps most important, claims must be filed with a renters or homeowners insurance

companies prior to claiming loss under the Host Protection Insurance policy.143

Insurance companies have taken steps to limit their exposure by refusing to cover Airbnb

hosts.144 Julie Pfeffer, a Delaware resident and Airbnb host, ran into some trouble with her

homeowners insurance provider, State Farm, after disclosing her activity as an Airbnb host.145

Despite Ms. Pfeffers long history as a low-risk homeowner with State Farm, the insurance

company no longer wanted to take on the additional risk.146 State Farm offered to sell Ms.

Pfeffer a commercial policy, since she was in essence using her home as a place of business.

139
Whats the Difference between Airbnb's Host Guarantee and Host Protection Insurance? | Airbnb Help Center.
2016. Accessed April 23. https://www.airbnb.com/help/article/938/what-s-the-difference-between-airbnb-s-host-
guarantee-and-host-protection-insurance.
140
Ibid.; also see Hayes, Galen. 2016. The Scary Insurance Reality for Airbnb Hosts. Accessed April
23.http://www.propertycasualty360.com/2016/01/05/the-scary-insurance-reality-for-airbnb-hosts.
141
Hayes, Galen. 2016. The Scary Insurance Reality for Airbnb Hosts. 2016. Accessed April
23.http://www.propertycasualty360.com/2016/01/05/the-scary-insurance-reality-for-airbnb-hosts.
142
Ibid.; also see Host Protection Insurance - Airbnb. Accessed March 31.https://www.airbnb.com/host-
protection-insurance.
143
Ibid.
144
Lieber, Ron. 2014. The Insurance Market Mystifies an Airbnb Host. The New York Times, December
19.http://www.nytimes.com/2014/12/20/your-money/the-insurance-market-mystifies-an-airbnb-host.html.
145
Ibid.
146
Ibid.
 33

However, that policy was much more expensive and would consume the profits she made as an

Airbnb host.147 Considering that Ms. Pfeffers insurance company viewed her as a good

customer, it is hard to imagine how an insurer would respond to a less reputable client. Of

course, Airbnb hosts can choose not to disclose their commercial activity, but if and when these

details are exposed, insurance companies would likely be even less forgiving. Unless Airbnb

works with insurance companies to form more comprehensive plans that shift the risk away from

the insurers, hosts may find themselves subject to higher premiums or no coverage at all. Higher

insurance premiums would cut into the profits of Airbnb hosts and the threat of termination

would likely deter them from using the site at all. Insurance companies, thus, play an important

role in the success of Airbnb and Airbnb needs to formulate a better policy to address insurers

concerns.

Airbnbs self-regulation scheme lends little consideration to the externalities its services

impose upon the communities in which Airbnb operates. For example, neighbors may become

frustrated with unruly vacationers and landlords and property managers may respond by banning

Airbnb-related activities in their buildings. Airbnbs reputation-driven success relies on

incorporating important stakeholders in order to form practical solutions that limit these

externalities, while maintaining the innovative and beneficial services Airbnb delivers. A policy

of regulated self-regulation would accomplish this. Under this model, a committee consisting

of relevant stakeholders (i.e., Airbnb executives, state government officials, homeowners

associations, condominium boards, insurance executives, etc.) would enter contractual

agreements to regulate Airbnbs activities within a city or state. The committees policies would

be bound by the contractual agreements between its members, thus giving them weight and

enforceability. This idea of committee-driven regulated self-regulation adds a sense of

147
Ibid.
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transparency to the policymaking process. Each represented interest thus has an added incentive

to contribute practical ideas that would serve the public good.

Airbnbs unique business model presents a plethora of regulatory issues that if unsolved,

can compromise both public welfare and Airbnbs future success. Therefore, Airbnb has an

incentive to work with regulators to create feasible and pragmatic solutions. Airbnb and its users,

however, should be optimistic, as many policy alternatives exist to mitigate the companys risks

to public safety, while preserving the innovation and efficiency that has brought benefits to so

many of its users.