The Tragedy of Your Upstairs Neighbors: Externalities of Home-Sharing∗

A common critique of home-sharing platforms is that they enable hosts to impose costs on their neighbors, creating a market failure. To explore potential public policy responses, we develop a model of the markets for home-sharing and long-term rentals, and predict market equilibrium outcomes under different policy regimes. With respect to efficiency, we find that when the home-sharing decision is left to individuals, there is too much home-sharing, whereas if the decision is left to a city that maximizes resident surplus alone, there is too little home-sharing. However, when building owners decide on the home-sharing policy of their buildings, externalities are internalized, and the level of home-sharing activity is socially optimal. Our model predicts that, in equilibrium, building owners will be indifferent between allowing and banning homesharing in their buildings. To assess this “no policy arbitrage” prediction empirically, we construct a dataset of NYC rental apartments listings, and find that, consistent with our prediction, costless policy choices analogous to home-sharing have no detectable effect on long-term rental rates. ∗Thanks to Yannis Bakos, Peter Coles, Bo Cowgill, Michael Egesdal, Andrey Fradkin, David Holtz, Michael Luca, Igor Popov, Justin Rao, Arun Sundararajan, and Richard Zeckhauser for their helpful comments. Financial support from the Center for Global Economy and Business is gratefully acknowledged. Author contact information and code are currently or will be available at http://www.john-josephhorton.com/.