The Tragedy of your Upstairs Neighbors: Is the Negative Externality of Airbnb Internalized?

Abstract

Peer-to-peer rental markets for short-term accommodation enable "hosts" to rent out properties to "guests." A common critique of such markets is that hosts benefit at the expense of their unwitting neighbors on whom they impose costs, potentially creating a market failure that justifies policy intervention. In this paper we examine four policy regimes that differ in the allocation of the decision right to become a host. We consider the market outcomes when hosting decisions are made by (1) individual tenants that maximize their revenue, (2) building owners that consider only rents from long-term rentals, (3) cities that consider the surplus of all city residents, and (4) a social planner that takes into account the surplus of both city residents and guests. We find that the equilibrium where tenants are allowed to individually decide has too much hosting, whereas city-specific policies result in too little hosting. The efficient social planner's solution is equivalent to the equilibrium where building owners decide. We conclude with a discussion of our results and lay out directions for future research.