Ownership and the Sharing Economy

Sharing can save a ton of money. We share apartments, cars, and office space with family, friends, and coworkers. We share roads, radio waves, and national defense with fellow citizens.

In cases like these, sharing leads to huge economic gain. So why don’t we share more stuff?

The problem, and its solution, has to do with ownership.

Ownership is comprised of a bundle of property rights

Broadly, the various types of property rights include (i) the right to use a good, (ii) the right to earn an income from the good, (iii) the right to transfer the good to others, and (iv) the right to enforce property rights. The term “ownership” applies to the particular bundle of property rights associated with a certain level of ownership. A property right is the fundamental unit in the broader abstraction of ownership.
If you buy a coat, you own it outright and have the complete bundle of property rights. You can sell it, give it away, wear it, burn it, or any other activity you see fit, so long as it does not interfere with others’ rights.
By contrast, if you rent an apartment, you have a specific bundle of rights that includes living there and earning income through subleasing, but excludes destroying it or selling it. If you buy a subway card, you have the right to ride a subway a certain number of times, and not much else.
We’re buying too many rights

Money can be thought of as a way to acquire property rights. But what do we actually want with our money; do we have a fundamental desire to own things? Generally, I would argue no; what we really want is the utility that can be derived from property. Outright ownership is only one way to derive this utility, and usually not the best way.

When you purchase a computer, you don’t really need the right to destroy it at any moment, or the right to make sure no one uses it while you're sleeping.

But people are rational, so why would they enter into suboptimal transactions? According to the Coase Theorem, as long as transaction costs are zero, bargaining will lead to a maximally efficient allocation of resources no matter the initial allocation.

The problem is that transaction costs are rarely zero. Property rights at varying levels below full ownership are often poorly defined (do you know the exact rights your Netflix subscription gives you?) and expensive to enforce. Also, partial ownership rights necessarily imply sharing with others, which comes with a wide range of costs, including moral hazard, transportation costs, psychological unease, and many others.
Because proprietary rights (a subset of full ownership rights) can be tricky and expensive, the default is often full ownership rights, even when a smaller bundle of rights would suffice.
This leads to massive economic waste. Your TV is off most of the time. Your iPad often goes unused. The majority of your wardrobe is sitting in your closet. Your car sits in the driveway while you travel. There is rampant unnecessary product duplication in all realms of life, simply because people fully own so many things.
Sharing is cheap, but comes at a cost

There are some real problems to sharing our property with others. For instance, relationships are impermanent, so we may not want to buy a house to share with four college buddies (this is a good economic reason in support of marriage; permanent relationships allow people to stop duplicating all their stuff). Many objects like TVs are heavy and impractical to move around (a good reason to start streaming all television through the internet). Moral hazard makes it so that people will be less careful with shared property (a good opportunity for new-age insurance companies).

Ownership can be defined in terms of exclusion. Generally, the more rights someone else has to something, the fewer I have. Intuitively, not everything lends itself to sharing equally well. Some goods are rivalrous, which means that one person’s use of a good decreases everyone else’s value.
Obviously, companies with offerings in the lower left quadrant of this diagram will most readily thrive in the sharing economy. But I believe technology will decrease transaction costs and open up opportunities across the board.

Shifting toward curated bundles of property rights

We rarely need the full bundle of property rights.
For every good, there is a tension between the cost of full ownership rights and the cost of a subset of proprietary rights plus transaction costs. Because proprietary rights are cheaper than ownership rights, companies that reduce transaction costs and provide the correct subset bundle of rights will be very successful.
 Many companies are already working toward this. Airbnb, Sidecar, Netflix, Rent the Runway, and others have started a shift toward shared ownership and curated property rights.

But still, there is room for much more to be done. I suspect that we will continue to see more companies push the sharing economy forward by figuring out ways to reduce transaction costs and help reshape our understanding and expectation of ownership.