NBER WORKING PAPER SERIES
OWNING, USING AND RENTING:
SOME SIMPLE ECONOMICS OF THE "SHARING ECONOMY"
John J. Horton
Richard J. Zeckhauser
Working Paper 22029
http://www.nber.org/papers/w22029
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
February 2016
Thanks to Andrey Fradkin, Ramesh Johari, Arun Sundararajan, Samuel Fraiberger, Hal Varian and
Joe Golden for helpful discussions and comments. The views expressed herein are those of the authors
and do not necessarily reflect the views of the National Bureau of Economic Research. Author contact
information, datasets and code are currently or will be available at http://www.john-joseph-horton.com/
At least one co-author has disclosed a financial relationship of potential relevance for this research.
Further information is available online at http://www.nber.org/papers/w22029.ack
NBER working papers are circulated for discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.
© 2016 by John J. Horton and Richard J. Zeckhauser. All rights reserved. Short sections of text, not
to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including
© notice, is given to the source.
Owning, Using and Renting: Some Simple Economics of the "Sharing Economy"
John J. Horton and Richard J. Zeckhauser
NBER Working Paper No. 22029
February 2016
JEL No. D23,D47,L1
ABSTRACT
New Internet-based markets enable consumer/owners to rent out their durable goods when not using
them. Such markets are modeled to determine ownership, rental rates, quantities, and surplus generated.
Both the short run, before consumers can revise their ownership decisions, and the long run, in which
they can, are examined to assess how these markets change ownership and consumption. The analysis
examines bringing-to-market costs, such as labor costs and transaction costs, and considers the operating
platform’s pricing problem. A survey of consumers broadly supports the modeling assumptions employed.
For example, ownership is determined by individuals’ forward-looking assessments of planned usage.
John J. Horton
Leonard N. Stern School of Business
Kaufman Management Center
44 West Fourth Street, 8-81
New York, NY 10012
john.horton@stern.nyu.edu
Richard J. Zeckhauser
John F. Kennedy School of Government
Harvard University
79 John F. Kennedy Street
Cambridge, MA 02138
and NBER
richard_zeckhauser@harvard.edu
Owning, Using and Renting:
Some Simple Economics of the “Sharing Economy”
John J. Horton
Leonard N. Stern School of Business
New York University
*
Richard J. Zeckhauser
Har vard Kennedy School
Har vard University
February 12, 2016
Abstract
New Internet-based markets enable consumer/owners to rent out their durable goods when not us-
ing them. Such markets are modeled to determine ownership, rental rates, quantities, and surplus
generated. Both the short run, before consumers can revise their ownership decisions, and the long
run, i n which they can, are examined to assess how these markets change ownership and consump-
tion. The analysis examines bri nging-to-market costs, such as labor costs and transaction costs, and
considers the operating platform’s pricing problem. A survey of consumers broadly supports the
modeling assumptions employed. For example, ownership is determined by individuals’ forward-
looking assessments of planned usage.
JEL L1, D23, D47
Keywords: Sharing economy; peer-to-peer markets; rentals; Airbnb; Uber; bringing-to-market costs;
transaction costs
1 Introduction
In traditional rental markets, owners hold assets to rent them out. In recent years, technology startup
firms have created a new kind of rental market, in which owners sometimes use their assets for personal
consumption and sometimes rent them out. Such markets are referred to as peer-to-peer or “shari ng
economy” markets. To be sure, some renting by consumer-owners has long existed, but it was largely
confined to expensive, infrequently used goods, such as vacation homes and pleasure boats, usually
with longer duration rental periods. More often, consumer-owner goods were shared among family and
friends, commonly without explicit payment. In contrast, these peer-to-peer (P2P) rental markets are
open markets, and the good is “shared” in exchange for payment.
A prominent example of a P2P rental market i s Airbnb, which enables individuals to rent out spare
bedrooms, apartments, or even entire homes. Airbnb and platforms like it have been heralded by many,
*
Author contact information, datasets and code are currently or will be available at http://www.john-joseph-horton.com/
Thanks to Andrey Fradkin, Ramesh Johari, Arun Sundararajan, Samuel Fraiberger, Hal Varian and Joe Golden for helpful dis-
cussions and comments.
1
as they promise to expand access to goods, diversify individual consumption, bolster efficiency by in-
creasing asset utilization, and provide income to owners (
Sundararajan, 2013; Edelman and G eradin,
2015; Botsman and Rogers, 2010). The business interest in these platforms has been intense; Airbnb
alone has attracted nearly $2.4 billion in venture capital investment and was valued at $25.5 billi on dur-
ing their most recent funding round.
1
Companies organizing sharing markets have also attracted policy
interest, much of it negative (
Slee, 2015; Malhotra and Van Alstyne, 2014; Avital et al., 2015).
Critics charge that the primary competitive advantage of these platforms is their ability to duck costly
regulations—regulations that protect third-parties.
2
However, the counter-argument is often made that
existing regu lations were designed to solve market problems that these sharing economy platforms solve
in an innovative fashion, primarily with better information provision and reputation systems (Koopman
et al.
, 2014), thereby making top-down regulation unnecessary. A better understanding of these markets,
and progress in resolving this policy debate, requires elucidating what economic problem these markets
address, why they are emerging now, and what their properties are likely to be in both the short- and
long-runs. This paper seeks to provide that elucidation.
Our first major question is why P2P rental markets only became a force in the 21st century. The eco-
nomic problem P2P rental markets are able to solve—under-utilization of durable goods—is hardly new.
We argue that technological advances, such as the mass adoption of smartphones and the falling cost
and rising capabilities of the Internet, while clearly important, only provide part of the story. P2P rental
markets rely heavily on the hard-won industry and academic exper ience in the design and management
of online marketplaces. In particular, recommender systems and reputation systems, which emerged
during the early days of electronic commerce, are central to the function of P2P rental markets. The
knowledge so conveyed allows P2P rental platforms to overcome—or at least substantially ameliorate—
market problems such as moral hazard and adverse selection. We develop this argument in more depth
and point out relevant works from the literature.
Our second major question i s what are the economic properties of P2P rental markets. For exam-
ple, what determines the rental rate and the quantity exchanged in a P2P rental market? How much
total surplus is “unlocked” by the P2P rental market, and how is it distributed? How does the short-run
situation—where existing owners rent to non-owners—differ from the long run in which owners and
non-owners alike can revise their ownership decisions in light of the presence of a P2P rental market?
Does overall ownership increase or decrease, and who owns what goods in the new equilibrium? When
1
http://www.crunchbase.com/organization/airbnb; Uber, which also has a substantial P2P rental market (albeit with a sub-
stantial labor component) was valued at $62.5 billion in their last funding round. http://www.wired.com/2015/12/airbnb-
confirms-1-5-billion-funding-round-now-valued-at-25-5-billion/.
2
For example, Dean Baker, in an opinion piece for the Guardian characterizes Airbnb and Uber as being primar il y based on
“evading regulations and breaking the law.” “Don’t buy the sharing economy hype: Airbnb and Uber are facilitating rip-offs.”,
The Guardian, May 27th, 2014. Access online on January 19th, 201 6. http://www.theguardian.com/commentisfree/2014/
may/27/airbnb-uber-taxes-regulation. See
Horton (2014b) for a discussion of the externalities imposed by Airbnb-style
subletting in rented apartments. Edelman and Geradin (2015) discuss both the promised efficiencies of “sharing economy”
platforms as well as the regulatory issues they raise. Cannon and Summers (2014) offer a playbook for sharing economy com-
panies to win over regulators.
2
there are substantial bringing-to-market costs (such as labor, excess depreciation, and transaction costs),
who bears them, and how does it affect the short- and long-run equilibria?
To address these questions, we develop a simple model in which consumers initially decide w hether
to purchase a good based on their expected usage. We consider a case where there are owners and non-
owners, with the owners using the good less than 100% of the time and non-owners, while not purchasing
the good, would use it some of the time if they did own it.
3
Some technological/entrepreneurial inno-
vation then creates a P2P rental market that allows owners to rent their unused capacity to non-owners.
For clarity, we first assume that owners face no bringing-to-market (BTM) costs (i.e., no depreciation,
labor or transaction costs from rentals).
After the P2P rental market emerges, owners and non-owners use the good as if they were renting the
good at the market-clearing rental rate. Renters do face the rental rate, while for owners, the possibility
of rental creates a new opportunity cost for their own usage. The rental rate is increasing in the valuation
of the owners, which reduces supply, and the valuation of the renters, which increases demand. The
short-run rental market does not necessarily clear: if pre-P2P rental unused capacity exceeds demand,
a glut results. In practice, the inherent costs of bringing excess capacity to the market assures an above
zero price floor.
In addition to the short run, we consider a long run where owners and renters alike can revise their
ownership decisions. We find that if the short-run cost to rent the good 100% of the time is below the
purchase price, then ownership is less attractive. This will reduce purchase demand for the product. In
the long-run P2P rental market equilibrium, the purchase price equals the rental rate (when normalizing
the life of the good to 1). Owners and renters receive the same utility at the margin, thereby decoupling
individual preferences from ownership. The model offers an intuitive test for whether total ownership
will decrease in the long ru n: ownership decreases if the short-run rental rate is below the purchase price.
Surplus increases in both the short- and long-run P2P rental market equilibria relative to the pre-
sharing status quo. Although owners have less consumption, they are more than compensated with
rental i ncome that exceeds their utility loss. The greatest gains in surplus are obtained when original
non-owners value the good nearly as highly as owners, suggesting that goods where income (rather than
taste or planned usage) explains ownership could offer the greatest increase in surplus. The existence of
a P2P rental market allows for a higher maximum price in the product market, as it can generate positive
demand for a good at prices for which even high-types would not buy without the possibility of rental.
When we assume that owners do face BTM costs, the model predictions change in several important
ways. If BTM costs are sufficiently high, no P2P rental market can exist in the short run. If the market
can exist, the BTM costs raise the rental rate and lower the quantity of the good transacted in the market,
in the both the long run and short run. However, BTM costs—being the equivalent of a per-unit sales
3
While we assume a purchase price that splits consumers into owners and non-owners, other equilibria are possible, such as
one where everyone owns the good. For a given set of consumer valuations, there is a range of product market prices that can
support a short-run P2P rental market. To support a P2P rental market, the purchase price of the good must be low enough that
there is a pool of owners, but not so low that everyone with any usage demand for the good already owns the good. Of course,
in the long-run ownership decisions can be revised.
3
