Regulating the sharing economy: The effects of day caps on short- and long-term rental markets and stakeholder outcomes

Abstract

Home sharing platforms have experienced a rapid growth over the last decade. Following negative publicity, many cities have started regulating the short-term rental market. Regulations often involve a cap on the number of days a property can be rented out on a short-term basis. We draw on rich data for short-term rentals on Airbnb and for the long-term rental market to examine the impact of short-term rental regulations with a day cap on various stakeholders: hosts, guests, the platform provider, and residents. Based on a difference-in-differences design, we document a sizable drop in Airbnb activity. Interestingly, not only targeted hosts (i.e., hosts with reservation days larger than the day cap), but also non-targeted hosts reduce their Airbnb activity. The reservation days of non-targeted hosts decrease between 26.27% and 51.89% depending on the treatment. Targeted hosts experience a similar decline. There is, nevertheless, significant non-compliance: more than one third of hosts do not comply with enacted short-term rental regulations. Additional analyses show that few properties are redirected from short-term rental to long-term rental use and that there is no significant drop in long-term rents. Drawing on a theoretical model, we tie the estimated effects to changes in stakeholders’ welfare: Regulations significantly reduce the welfare of hosts, and the loss ranges between 46.30% and 9.02%. The welfare loss of the platform provider is proportional to the loss of the hosts. Welfare of guests decreases moderately ranging between 4.5% to 4.1%. The welfare of residents increases minimal. These results question the effectiveness and desirability of the studied short-term rental regulations.