The Tragedy of your Upstairs Neighbors:When is the Home-Sharing Externality Internalized?

Apostolos Filippas John Horton NYU Stern NYU Stern

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Rapid rise in "home-sharing"● Platforms enable owners to rent out properties to

short-term guests○ e.g., Airbnb, HomeAway, VRBO, CouchSurfing

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● Rapid growth○ 100+ million nights will be booked on Airbnb in 2017○ valued at $31 billion○ (Zervas et al. 2014, Cusumano 2015, Farronato & Fradkin 2017)

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● Mostly viewed as beneficial development ○ increased variety, underutilized assets put to use ○ reduced costs for guests, income for asset owners ○ (Sundararajan 2016, Einav et al. 2016, Horton and Zeckhauser 2016)

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Policy issues raised by home-sharing

● Home-sharing platforms facilitate racial discrimination○ (Edelman et al. 2017)

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● Home-sharing raises long-term rents by removing supply ○ (Sheppard & Udell 2016)

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● Home-sharing directly imposes costs on neighbors○ (This paper)

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Neighbors Guest Owner

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$$

$$

Home-sharing as a negative externality

● Hosts impose a cost on their neighbors○ hosts get the money, guests get the noise/risk/parties/...

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● Similar to classic cases of un-internalized externalities○ pollution, overfishing, speeding while driving

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● There is "too much" of the activity in equilibrium ○ in practice, negative externalities solved with public policy

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What are some public policy options?

● Common policy approaches likely to be ineffectual○ Coasian bargaining○ Charge per unit of externality, marketable hosting permits

● Another approach:

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what are the equilibrium quantities and welfare implications

of different ways to allocate host decision rights?

Research Questions

1. Who should make home-sharing hosting decisions?

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Individual tenants

Building owners

City government

Benevolent social planner

What happens when the decision is made by:

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Our analytic approach

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1. Allocate hosting decision rights to: {individuals, building owners, city, social planner}

i.ii.iii.

2. Determine the resulting market equilibriumi.ii.iii.

3. Characterize the welfare properties of that equilibrium

Some definitions● The going price for a home-sharing stay is

○ price is endogenous: decreasing in number of hosts■

● Tenant has hosting cost■

● The host has neighbors in the building■

● A guest imposes a cost of on every neighbor ■

● An additional listing is (socially) efficient so long as 10

The four regimes

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Set building-wide policiesCare only about profits from long-term rents

Host if

Centrally adjusts supplyCares only about tenants

Centrally adjusts supplyCares about tenants and guests

Market equilibrating process

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Move to the "right" building

Host if Set policies Price updated

Market equilibrating process

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Move to the "right" building

Host if Set policies Price updated

Costlessly (we will relax this later)

Tenants-Decide regime

● Laissez-faire○ tenants are free to decide whether to host or not

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● The "marginal" tenant who hosts, has hosting cost equal to the market price ○

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● This is inefficient → there is too much hosting. 14

Tenants-Decide regime

● Inefficiently high amount of hosting

●● Tenant welfare ↘

(potentially)

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TD regime - externalities

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● Externalities are not internalized

"City decides" regime

● The City decides on a home-sharing quantity■■

● The City only cares about residents’ welfare○ behaves like a monopolist

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● There is too little hosting

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"City decides" regime

● Host welfare ↗(optimal)

○● Social welfare ↗

(but not optimal)

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"Building owners" decide ● Building owners

○ only care about profits from long-term rentals○ set a blanket policy for the entire building

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● In equilibrium:○ owners are indifferent between costless policies → no premium

"no policy arbitrage"■

○ marginal host indifferent between hosting and not hosting

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"Building owners" decide

● Socially optimal amount of hosting

●● Tenant welfare ↗

(always)

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BD regime - externalities

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● Externalities internalized

Research Questions

1. Who should make home-sharing hosting decisions?○ Building Owners

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2. Does our "no policy arbitrage" prediction hold?

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"No policy arbitrage"

● In equilibrium, building owners should be indifferent over costless policies

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● Problem: home-sharing is relatively nascent○ data from existing rental markets unlikely to offer a compelling test

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● Solution: test this prediction using subletting decisions○ Conceptually similar○ Slight administrative cost○ Large externality costs to neighbors & prospective renters

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Data

● ~21,000 apartment listings in NYC

● Attributes of each listing (# beds, amenities, ... )

● Whether each listing allows for subletting

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Assessing the "No policy arbitrage" prediction

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Assessing the "No policy arbitrage" prediction

Counterfactual

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Research Questions

1. Who should make home-sharing hosting decisions?○ Building Owners

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2. Does our model’s "no policy arbitrage" prediction hold?○ Strong evidence that it does

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3. What are the convergence properties of a market operating under the BD policy regime?

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Converging to the BD equilibrium

● Our equilibrium analysis assumes tenant sorting ○ tenants have to move into the “right” building

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● Problem: convergence not guaranteed● Problem: excessive amount of tenant sorting required● Problem: moving costs & tenant "lock-in"

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● Solution: use an agent-based model28

Convergence

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Moving Costs

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Within-building type correlation

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Research Questions

1. Who should make home-sharing hosting decisions?○ Building Owners

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2. Does our model’s "no policy arbitrage" prediction hold?○ Strong evidence that it does!

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3. What are the convergence properties of a market operating under the BD policy regime?○ Good convergence properties ○ Moving costs matter (negatively)○ Within-building correlation matters (positively) 32

Concluding thoughts

● Delegating home-sharing decision rights to building owners seems to be a good idea○ socially optimal, externalities internalized○ market-based policy: information-light, self-adjusting (Tirole, 2015)

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● If you have to be in the CD regime, assign home-sharing licenses to buildings (not to tenants)

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Concluding thoughts

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New problems that home-sharing platforms create need to be addressed before their benefits are to be fully realized

1. Within the platform a. Discriminationb. Other design issues

a.b.

2. Outside the platform a. Houses off the rental marketb. Negative externalities

Concluding thoughts

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New problems that home-sharing platforms create need to be addressed before their benefits are to be fully realized

1. Within the platform a. Discriminationb. Other design issues

a.b.

2. Outside the platform a. Houses off the rental marketb. Negative externalities

Doable!

Thank you!

Paper Title: The Tragedy of Your Upstairs Neighbors: Is the Home-Sharing Externality Internalized?

Authors: Apostolos Filippas and John Horton

Draft:http://www.john-joseph-horton.com/papers/airbnb.pdf

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Backup Slides

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Benefits of Home-Sharing

Product choice set is expanded

Underutilized resources put to use

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Tenants’ building choice

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