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Regulatory Hacks

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73 pointszachh57 comments

The usual term for this is "regulatory arbitrage."

I do want to take exception to one point though:

> Of course regulations that truly protect the public interest are necessary. But many regulations are created by incumbents to protect their market position. To try new things, entrepreneurs need to find a back door. And when they succeed, it will all look obvious in retrospect. Today’s regulatory hack is tomorrow’s mainstream industry.

It's really a lot more complex than this. A lot of the regulations that seem obviously protectionist now really weren't at the time they were implemented.

The FCC is rife with examples of seemingly protectionist regulations because one of the core parts of its mission is to ensure universal coverage. It exists to ensure that every little town in the US gets access to the new communications technologies within a reasonable time.

Things like local monopolies/duopolies are the tool that the FCC uses to get companies to serve areas that the free market would leave unserved. The FCC says: "okay, you get a duopoly in Chicago, but you have to build out service to Belleville, IL."

The taxi regulations operate much in the same way. If taxi companies were left to their own devices, they just wouldn't operate in the sketchier parts of town. They'd refuse to drive you to the Bronx. Protectionist regulations are the concession that municipalities give to taxi companies in return for forcing them to provide certain services and maintain certain rates.

You'll also see a lot of this in the utility industry. Local monopolies with guaranteed rates of return are an incentive municipalities use to get companies to provide power/water/gas to everyone, instead of just the places where it's profitable.

Municipal regulation is a very complex topic, both legally and in terms of economic theory. You can't consider the regulations standing alone, when you're talking about industries that in some way form the infrastructure of the city or relate to urban planning. You have to consider them in the context of being alternatives to the cities building out certain infrastructure themselves as part of their mandate to provide service to each one of their citizens.

Taxi regulation also serves the purpose of creating consequences for harming the community. A taxi medallion is valuable. A profile on a dating site isn't. There is no cost-effective way for us to police every vehicle on the street; you'll learn this quickly if you get your license suspended when you realize that basically nothing happens as a result as long as you're a reasonable driver).

So instead, we create a different class of vehicles, require that only vehicles from that class can carry passengers for hire, and when those vehicles are driven unsafely we can revoke their licenses. It's hard to see how you can reliably revoke someone's online car dating license.

These modern rideservices can expel drivers (from the dispatch-and-payment system) far more effectively than traditional regulations could suppress gypsy cabs.

Policies should be driven by real results and demonstrated harm... not by assuming that the risks/regulatory-tools of decades ago still apply.

Exactly how does Uber reliably "expel" a driver?

Ban their DL. Ban their device. Ban their car tags. Include a photo of their approved drivers.

It's then at least as hard and probably harder to masquerade to Uber as someone completely different than it is to masquerade to traditional regulatory authorities.

Entering an Uber car, my own trusted device can supply me with car and driver info, including photograph. In traditional systems, I'd have to trust unauthenticated documents (including car markings) provided by the car/driver. Such forged traditional documentation can even fool local law enforcement, in some gypsy cab situations.

And even if someone can occasionally slip into the role/reputation of another driver in good standing, with that other driver's cooperation, there is still a chain-of-control/motivation incenting good behavior and allowing punishment of transgressions (through the accomplice who loans out their valuable identity).

We would need to empirically study whether this system offers better results, overall, than the traditional system. I suspect it does: even if you can contrive a few exploits, they could still be less prevalent/practical than the weaknesses of the traditional system.

Ok, now imagine there are 10 competing Ubers.

Straining one's imagination is a bad way to inform policy. Observe, don't imagine.

There won't be 10 Ubers: the reputation angle and network effects strongly favor a few large recognizable operators. And maybe just one!

But even if there were 10: accident, citation, and criminal records are easy to check. Consumers will prefer the branded/authenticated services which self-police most effectively.

Traditionally, this may have been a problem needing regulation: at the moment of flagging a streetcab, the fare was at the mercy of the provider, with minimal authentication/reputation information available.

Now with the modern mobile-dispatched services, this problem is obsolete... like the problem of needing to buy a paper street map when arriving in a new city.

You have to strain your imagination to see 10 competing companies? This is another bias routinely evident on HN: we think of public policy for new business models solely in terms of the best-known operator of that model; it's not about regulating livery, it's about regulating Uber. No.

You don't have to change the subject to be about my capacity for imagination, or some bias you perceive in other HN conversations.

There aren't 10 such companies now. There might never be. Nor is there yet any evidence of consumer harm.

Imagining the worst when it might never materialize is a bad basis for policy. Especially with all the new factors which provide stronger, more-immediate checks on bad-actors: many of which apply to one operator or 100 equally well.

Why not give them a chance to work before constraining new operators to an ancient system which (a) disappointed customers with scarcity; and (b) got captured by incumbents?

You don't design public policy based on the interests and controls of one single private company.

This thread began with me describing the general case, "these modern rideservices".

I happen to think there will be few of these modern rideservices, rather than many, because the matching/reputation market has natural monopoly characteristics. But that's just an aside.

The tech/market/reputation checks I've been describing don't depend on Uber or any particular company. They are inherent to the category. I am making a case for the modern mobile-dispatched-and-billed rideservices category, not Uber specifically.

(My guess would also be that the average customer is more likely to someday face economic 'harm' from an eventual dispatcher monopoly, than from the sort of dangerous/abusive/unaccountable car/driver issues that you've been mentioning. But those sorts of antitrust concerns also need to be handled in retrospect, after observing how they develop, and not based on anticipatory paranoia about what might someday happen.)

Don't tell the driver where the customers are.

There is no way that banning someone from a single website is more effective than putting them in jail or prison (depending on the state). For that to work, all of the psuedocab/ride-sharing services would have to work together to blacklist drivers who violate their rules, but this is illegal in many states, especially California, in which several of these companies are based.

A driver doing something so bad the penalty is incarceration can be incarcerated whether they do it in a traditional cab or a new carservice. Also, accident/citation records are available to insurance companies and others, even for non-commercial drivers.

You missed his point. By regulating cabs, we can easily make the penalties for breaking the cab rules strong enough to deter bad actors. Uber can't.

We can make the penalties for any real problems that arise as strong as needed... when they arise. Expulsion from Uber/etc might be enough. If it isn't, it doesn't require traditional licensing/regulation to increase the penalties for specific actions.

1. The fundamental difference about Uber (that I think is implicit to proponents but gets lost in the actual discussion), is that you're using a well-known public-facing party to request the service in the first place. This has wide ranging benefits for consumer protection (not that it solves everything, but most taxi regulations exist because you've traditionally had to trust the first guy that drives by in a yellow car, or an informally run dispatch station). Specifically in relation to your point, Uber has a strong incentive to make sure drivers are licensed (and if not, their business insurance sure does).

2. Maybe two years ago, I was in the car when my friend got pulled over for driving "without" a license (MA RMV SOP is to suspend licenses without notifying). He passed a clearly visible state trooper (going under speed limit, ofc) stopped two lanes over. Five miles later, he's being pulled over because the trooper had run his plate and saw that the vehicle was owned by someone with a suspended license. Whether it's technology or simply an overabundance of cops, those quaint days of enforcement directed only at drivers that stick out are pretty much over.

Uber's drivers are, I believe, 1099 contractors. If an Uber driver operates unsafely, the driver and Uber simply sever the relationship, and the driver goes somewhere else.

I'm not sure I buy the story about being pulled over for a suspended license, for a bunch of reasons:

* Over the last 10 years, I've driven more on suspended licenses than valid ones (I'm a very safe driver but I suck at getting my plate sticker updated and suck even worse at actually paying the resulting tickets). I've never been pulled over for having a suspended license, or even heard of someone being pulled over for that.†

* The police in Illinois and, I assume, most other states have strict rules about when they can pull people over (the "primary" and "secondary" offenses). If your car is compliant and you aren't committing a moving violation and you're wearing your seatbelt, what grounds does an officer have to pull you over? Consider that cars are often driven by people other than their owners.

* There are too many valid reasons you can be pulled over. Tail light out. Sticker's a month out of date. Improper lane change. "Not wearing seat belt".

Are you sure you're not confusing "suspended license" with "suspended tags"? Driving on suspended tags will get you pulled over quickly. Illinois will suspend your plates for things like toll violations.

I stand by my assertion: if you're a good driver, and your car is compliant, you're probably pretty safe driving on a suspended license. There is a pretty low probability of getting a relatively stiff ticket, and that's about it. Make sure your plates are good.

† I get pulled over, mind you. Just not for having a suspended license.

But the customer remains with Uber. And it's not like taxi drivers drive safe - I rarely take taxis, yet I once had a taxi driver who simply went through a red light after I casually remarked "this light is always red".

Really, you don't "buy" the story? Well it happened, in point of fact. Maybe telling you that said friend works at that binary analysis company in Burlington will provide enough of a connection to let you be convinced that I'm not just making up stories on the Internet for kicks?

This was at night, simple driving with no other cars around. I'm pretty sure the cop actually said that his probable cause was that the owner of the car was unlicensed. We switched places at the cop's direction (after he checked my license) and I drove the car for the rest of the trip.

The cop could have simply been done stopping, caught up to us (their standard speed is 110mph), and lingered next to us to idly run the plates. But at the time it really felt like the plate must have been automatically captured as we drove by.

I very very much doubt you'd just make something up. I'm just saying there are alternate explanations that make more sense. Happy to be wrong; still stand by my analysis. :)

The attention could have been due to racial profiling, but that would require the cop to have seen the driver in the dark at 60mph - still requiring deliberate effort in the first place. The cop could have just been passing us, which gets him closer but requires assessment from the rear to notice the in-progress DWB. But also the way he came up really didn't read as a dwell-and-pass. What are other alternate explanations?

Furthermore it's not really a matter of IF cop cars have automated license plate scanners, it's a matter of WHEN. And then if the law allows a presumption that the owner is driving, which is perhaps the only thing saving you from even more tickets in IL. :)

Alternate explanation: the cop was going to pull you over anyways, for whatever reason ("improper lane change" is a synonym for "I need to write someone a ticket now"), and, once he did so, he ran the plates like the police always do when they pull someone over... and poof! there's his ticket to write.

>They'd refuse to drive you to the Bronx. They already do. Routinely. And the best you can do is a 311 complaint, which feels somewhat dick-ish.

>A lot of the regulations that seem obviously protectionist now really weren't at the time they were implemented.

True. Somewhat analogous to the law of unintended consequences. One potential way to address this would be through the use of sunset provisions: http://en.wikipedia.org/wiki/Sunset_provision . The downside of using sunset provisions would be the regulatory volatility given our (somewhat) hyperpartisan regulatory environment.

You can usually tell whether a regulation is obviously protectionist, by what the incumbents say about it. Incumbents are basically paid to say exclusively the things that improve their business prospects/competitive position/share prices. It's almost a fiduciary duty. As a consequence, when the a hotel company CEO complains about AirBNB or a medallion owner complains about Uber, you'll notice that they are usually asking for these services to be banned, (or regulated into uncompetitiveness) rather than regulated. In the example cited on the post - the duopolies never asked for the new service to be regulated to their standards - they simply asked to ban it. Even more egregious are moves like the DC City Council repeatedly trying to generate a whole new set of laws just to deal with Uber.

Anytime an incumbent objects to the illegalness or dubious legal position of a new service, you can pretty much bet its because they feel threatened. The fact that it happens to be in the "public interest" (in terms of the service doing something that's against today's law) is merely secondary.

> Regulations follows business as much as business follows regulations.

A lot of real insight in this comment. Regulations and laws are mostly what society agreed was allowable last time we decided to negotiate it. While we (as startups/consumers/businesspeople/engineers) should always strive to do the right thing, we should also remember that in many cases, the "right" thing can be considered illegal (if this wasn't the case, laws would never change to reflect society's current preferences).

Airbnb and Uber are running up against regs problems. Is Aereo? Aereo is being sued by rightsholders, who argue that as the parties that fund the creation of content, it should be up to them how to commercialize it. Copyright isn't regulation. Copyright infringement is a tort.

The regulatory hurdle Nextel faced is also different from the ones Airbnb and Uber face. If you took Airbnb out of the picture, it's unlikely that HN would be so friendly towards the idea that giant hotel corporations should be able to operate with zero regulations.

But if Marriott must be regulated, it's reasonable (though not dispositive) for them to note that it's unfair for them to be structurally disadvantaged by competing with businesses that effectively arbitrage regulations (and, more importantly, regulatory enforcement).

AirBnB is classic regulatory arbitrage.

Basically you have a type of business, a hotel, that creates a negative externality in an area. You have regulations and zoning that attempt to minimize that negative externality, or at least isolate it to commercial areas. Then you have AirBnB arbitraging those regulations to profit.

There is a fraction of Airbnb's client base that is purely regulatory arbitrage --- the people who buy buildings and rent out all the rooms on Airbnb.

But there's also a large fraction of Airbnb's business that is generating value. The 4-bedroom 2-storey townhouse in W'burg that Airbnb has isn't available on the hotel market at any price, and the owner of that very valuable property has lots of incentive to keep it up, but because he's at Cornell for the next several years, the house is a cash-flow drag to him. Everybody wins when he carefully rents it out on Airbnb.

The challenge is to come up with a system of regulations that works for both circumstances.

I'd say that both are generating value.

The people who buy building and rent out all the rooms or Airbnb provide a liquidity the market needs - they are doing something "of value"

If they do that for profit, odds are they are making money and the next best use of these buildings would bring less money.

Mob hotels generate value in the hotel market the way an illegal tire fire generates value in the waste management market.

Good point.

It's worth noting that AirBnB's reputation system might be effective for reducing the externality in question.

We have years of experience with it. Has it worked? Do we still have "mob hotels" in NYC? Are people still unlawfully subletting their apartments?

Moreover, what's the theory on which it could work? If you have the capital to buy a building solely to collect rents on Airbnb, what stops you from just unloading the building if/when your reputation becomes a meaningful obstacle, and then just using a different shell to buy and let out a different building?

I think there's a lot of thinks Airbnb could do here; I like Airbnb. But I'm always a little skeptical of the magical powers of "reputation systems".

It depends what you mean by 'worked'. It's certainly worked for me and the vast majority of AirBnB guests and hosts, I imagine. If you value obeying the law above all else then probably not, but most people don't. For instance, with unlawful subletting, I don't see who's harmed as long as guests behave responsibly, which should be ensured by the reputation system.

The 'buy a whole building just to rent it out' case is a little more ethically dubious for me, but normally that kind of operation isn't too hard to spot from afar, and I can't imagine AirBnB guests being too thrilled staying there.

> For instance, with unlawful subletting, I don't see who's harmed as long as guests behave responsibly, which should be ensured by the reputation system.

As a fellow tenant, my level of comfort with my daughter running unattended to a friend's apartment in the same building is less if I know there are lots of people running AirBnB sublets out of their apartments than if I know everyone is a resident subject to a background check and on a 6-12 month lease.

Maybe the increase in risk from transient AirBnB tenants is small, but it's not zero. That loss of comfort, and that non-zero increase in risk is a harm to the other tenants in the building.

Presumably the landlord would be liable for any harm incurred by other tenants under this scenario (especially as they've broken their lease agreement), which provides them with a fairly strong incentive to check up properly. The reputation system is also designed to help them with this.

EDIT: I was actually talking about the subletter (person who signed the original lease) rather than the landlord of the property itself.

Sure you can sue the AirBnB host, but individuals rarely have the money to pay judgments for serious damage or bodily injury, nor do they have insurance for such occasions. That's the whole point of renting in a reputable apartment complex--it pushes the responsibility and and liability for security in the common areas to the building management, an insured entity with the resources to pay for any resulting damages.

I think people who are proponents of AirBnB dramatically underestimate how much monetary value people attach to the kind of people they live around, especially in city apartment buildings where lots of people who barely know each other live in close proximity. A condo in a building that has some fraction of renters can sell for substantially less than an identical condo in an identical building that is 100% owner-occupied. Rents at buildings with 12-month minimum leases are higher than rents in buildings with 1-month minimum leases. People go out of their way to buy into coop buildings that have minimum down payment requirements, etc.

I live in an apartment in downtown Chicago. The major businesses in the area are Northwestern Memorial Hospital and Northwestern University. Thus, most of the residents are medical residents, nurses, graduate students, etc. This tenant composition is priced into my rent. We have a lot of families that live here because it's a bit away from all the tourists on Michigan Ave and because every tenant undergoes a background check. If a bunch of tenants started illegally subletting their apartments on AirBnB to aforementioned tourists, that would upend everyone's expectations and decrease the value of the building to all of us.

Do you think the grad students in your apartment ever have family to stay? What about friends? What about couchsurfers (if there are any meaningful number of students in your apartment, it's very likely at least one an active couchsurfer)?

Who do you think poses a bigger risk to other tenants, my cousin's friend who's crashing with me in Chicago while he finds a place to stay permanently, or someone with 100 positive reviews on AirBnB? 20 positive reviews on AirBnB? Where do we draw the line on what's ethical here? I think most people wouldn't see any problem with the first scenario but would with the second, but the risk is probably lower in the second scenario.

(Perhaps AirBnB should purchase insurance on behalf of AirBnB landlords. I'm sure they have data on how often these kinds of problems occur and I can't imagine it being too expensive)

EDIT: Looks like they already do have insurance of some kind: https://www.airbnb.com/guarantee

The difference is that the building's management company takes responsibility for the typical temporary guests of those who live in the building. AirBnB does not take any responsibility for the guests of AirBnB hosts. Moreover, nothing requires an AirBnB host to only take people with 20+ positive reviews. It's entirely up to the AirBnB host. The host has full control over the decision, even though his decision exposes the rest of us to risk.

It looks like AirBnB will already cover some kinds of theft or vandalism. It presumably wouldn't be too hard for them to extend that to personal injury in shared spaces, which would partly address your concern.

Also, the building management company would evict tenants who had troublesome guests, which provides the tenant (AirBnB host) with an incentive to only take people who are reliable.

Why do you presume it would be easy for them to provide personal injury protection across their entire inventory of rentals? The set of circumstances that led to their particular current coverage of theft and vandalism is worth revisiting.

Well, it's pretty much a textbook case for insurance: a very small risk spread across a large number of rentals where the worst case is bad. AirBnB has the advantage that they could tailor the premium based on the exact parameters of the rental.

If it's so straightforward for Airbnb to insure the things you're talking about, why is the "Host Guarantee" they came up with along with Lloyds of London so restrictive? For instance: if you let a place out to an Airbnb guest, and they forget to lock the door, and your place is burgled as a result, you're not (it seems) covered.

OT: Chicago, engineer, lawyer. Neat! (My office is in Printer's Row). Do you practice law, or are you in tech?

Very cool! I was in tech (wireless), now I'm doing the law firm thing for awhile.

Landlords of desirable properties are aren't incentivized to allow their spaces to be listed on Airbnb at all; the good properties will have naturally low vacancies, because apartments in desirable locations have effective markets already, and those markets provide much better terms to landlords than Airbnb rentals do.

So you're left dealing with an unfortunate subset of landlords.

It's very likely that the liability policy that the landlord carries has an exclusion for the type of subletting that AirBnB does, putting all of the liability on an effectively uninsured landlord.

> I don't see who's harmed as long as guests behave responsibly, which should be ensured by the reputation system.

I agree, but I have a feeling that it won't play out that way in practice.

I would have agreed with you up until about 2 years ago. I've been a home owner for a good 10 years now, we moved a couple of years ago into a new neighbor hood.

Most of hte homes are very nice and well kept up, but the ones that are the most in need of repair are the rentals. And subsequently the houses beside them take a hit in property value.

We know most of the renters and they are nice hard working people who do the upkeep( cut grass, weed flower beds, etc), but the large repair items are always left undone.

the painting, shingling, gutter cleaning, etc. And it makes sense for both parties not to do it. The renters don't care and the home owners don't care about their property values until they sell.

Sadly though having renters in a neighborhood brings down property values. I'm pretty certain that having a high concentration of AirBnB renters would bring down values even more.

So there is harm done, a fair bit of it.

My wife's uncle had a renter for a house in the woods. The renter let her dogs urinate freely in the house. My wife's uncle has totally resurfaced the floor and still can't get the smell out. He'll have to rip out all the drywall because the urine has wicked into it from the floor boards.

Now obviously this is an extreme example, but stories like this aren't totally unheard of. If you know several people who rent out properties regularly, chances are that they have a couple of horror stories between them.

Presumably your wife's uncle did everything right (credit and background checks) and still got burned. Without being snarky, he might well have had more luck with AirBnB.

The point isn't that AirBnB is better or worse for finding a renter than Craigslist or an ad in the local paper. The point is that renters create more risk than owners, and short-term renters create more risk than long-term renters.

If you own a house in the middle of the woods, you bear all the risk for the quality of your renter. If you live in a condo building, the other tenants are exposed to that risk. In the former case, I can totally control the level of risk I'm exposed to based on my choices of who I host. In the latter case, if I'm a fellow tenant, I have no control over that risk. The AirBnB host in my building might only choose tenants with 100+ reviews, or they may choose tenants with no reviews.

Your argument is that you wouldn't want to live in a building where the tenants hadn't undergone background checks and credit checks, and that this increases risk. My argument is that they obviously don't do much to protect the host anyway, if plenty of landlords have horror stories. I've talked to every AirBnB host I've stayed with (and I've stayed with a few) about this and not one had anything negative at all to say about their guests.

I would suggest trying AirBnB a little and looking at what the people who actually use the service are like first without worrying about some kind of imagined stranger danger.

Having any short-term renter increases risk versus a long-term renter versus an owner. That's just the nature of the industry.

My point is that as a tenant in a building with an AirBnB host, I have absolutely zero guarantees about what kind of tenants AirBnB hosts take on. Maybe some need the money and are willing to take on people with no reputation scores? I'm willing to trust my building management to take responsibility for screening tenants because if they fail I can sue them and I know they can pay because they are insured.

That's the point you keep dancing around. AirBnB's reputation system might be great. That's irrelevant to me as a tenant in the same building. I don't get to see or have any control over the reputations scores of the people AirBnB hosts in my building take on. The AirBnB host exposes me to a level of risk, he is in total control over that level of risk, and he doesn't carry insurance against that risk. That is a harm to me.

> Your argument is that you wouldn't want to live in a building where the tenants hadn't undergone background checks and credit checks, and that this increases risk.

Not really, my point was with respect to who cares for their property the most: owners > long term renters > short term( 1 week or less) renters

I sympathize, I've lived in a fairly similar area recently (the University District in Seattle - lots of student renters who obviously don't care).

However, at the moment, the landlord's not doing anything illegal at all. How can we deal with this kind of scenario effectively?

The owner of the property is harmed, when they agree with a renter on a contract with specific terms, and the renter then secretly reneges on those terms to take all the profit from the owner's increased risk for themselves.

Of the companies mentioned Aereo is clearly the biggest hack.

The regulation that having a single antenna for multiple subscribers is not ok seems to inevitably lead to Aereo's one antenna for each subscriber - and ultimately antenna farms.

Having (someday) millions of redundant antennas in rows to avoid copying signals to meet an outdated regulatory requirement is so hilarious, I'm tempted to call it entrepreneurship as social commentary.

Aereo is not a regulatory hack, at least not in the context that the other companies are regulatory hacks. It is a business model designed according to what courts have said is legitimate commercial activity involving visual media. It's not trying to bypass existing rules or regulations; rather, it is very carefully modeled to work within what the courts have stated is appropriate. (It is an open question as to whether courts will deem its business model to run afoul of IP laws.)

AirBNB, Uber, etc., are/were regulatory hacks because they are/were attempting to flout or "bypass" existing rules and regulations in their various markets. In AirBNB's case, rules against hoteling; in Uber's case, rules against unlicensed cab and livery services. The difference from Aero: there are no enabling laws or interpretations of existing laws that actually state that what AirBnB or Uber does is (legally) acceptable, but there are plenty of existing laws and regulations that state what they are doing is not acceptable.

It always struck me that a legal hack was Microsoft's real, core innovation -- the whole OEM installation agreement, more than anything to do with the superior quality of its operating system. It took decades for the regulators to catch on.

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