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Built on trust

October 12, 2017

THE rise of the gig economy poses numerous regulatory challenges. The unique nature of this model where an application serves as an intermediary to connect consumers with suppliers, without actually employing the worker or owning the underlying asset, has rendered the traditional regulatory landscape redundant. This allows businesses to operate in a legal vacuum without facing the regulatory constraints their competitors face.

For Richard Posner, this represents a pattern of economic development where the rise of unregulated competition leads regulated entities to demand that regulatory controls be relaxed or expanded to provide a level-playing field. A similar pattern is playing out in Pakistan where recently taxi drivers staged a protest against Uber and Careem.

Islamabad’s transport authority responded by proposing imposition of a tariff on the fares that Uber and Careem may charge. The fact that this suggestion could even be floated shows the extent to which our policymakers lack an understanding of how ride-hailing apps work and how hasty regulation responding to interest group pressure can kill rather than promote new business.

Uber, for instance, uses the forces of supply and demand to match drivers with riders. When prices go up in a particular area due to increased demand, the change in price is a signal for drivers to enter that area to cater to excess demand. But if drivers increase at a greater pace relative to demand, then the price falls. Price communicates information and the latter is valuable to both parties even if the price is higher than normal: consumers benefit from the availability of additional drivers and drivers from being able to earn a better return for the same amount of time.

Too much regulation can kill the gig economy.

Tampering with this system by capping fares, as the government proposes, is a foolish idea; it would undermine the very model which makes these ride-hailing apps attractive. Instead, the government should attend to other areas of concern like consumer safety and protection of labour.

Fitness certificates for cars, background checks and trainings for drivers are normally tabled as solutions for protecting consumer safety. However, they must be carefully appraised considering that the gig economy is built on trust that includes significant network effects. People who would otherwise hesitate to sit in a stranger’s car don’t do so if they are connected to the stranger through Uber ie consumer trust in the brand facilitates the exchange.

Uber and Careem, thus, have an incentive to preserve this trust by ensuring that cars are properly maintained and drivers suitably trained. This incentive is amplified by network effects which means that the value of business depends on the number of people using the platform. In circumstances where the market provides (some) incentives for protecting consumers, any regulation for improving consumer safety must proceed only after conducting a thorough cost/benefit analysis.

Similarly, excessive background checks while promoting consumer safety can make entry and exit more difficult. When ease of entry and exit is reduced, people will find it costly to enter the labour market which, in turn, will discourage the formation of a large and fluid labour pool for the gig economy.

As for those who do work in the gig economy, a related issue concerns their protection. In law, labour has traditionally been classified either as employees or independent contractors with the former enjoying greater protection. But the rise of on-demand labour is putting a strain on such classifications.

For example, how do we go about classifying people whose only source of income comes from driving Uber but who are free to choose when to drive and how much to drive? It would be unfair to treat them as employees — entitled to minimum wage and other social security benefits — since Uber and Careem exercise very little control over them. But equally disturbing is the idea of having to leave a large chunk of this on-demand workforce out of the social safety net in an age of Data Darwinism, a term coined by Om Malik to explain the phenomenon of a ‘quantified society’ where drivers with low ratings are slowly weeded out based on consumer feedback for which consumers don’t necessarily feel responsible. Some scholars propose creating a third category of ‘dependent contractors’ to plug this gap but the efficacy of this solution remains to be seen.

In any case, whichever way our policymakers drift, one thing is for sure: too much regulation runs the risk of killing the gig economy and stifling innovation in our nascent start-up market, but too little regulation can leave the on-demand workforce without protection. Striking an appropriate balance between these regulatory trade-offs is key, which requires a thoughtful analysis.

The writer is a lawyer.

Twitter: @bbsoofi

Published in Dawn, October 12th, 2017