The Tragedy of Your Upstairs Neighbors: Is the Airbnb Negative Externality Internalized?

TL;DR

This paper examines whether the rise of Airbnb leads to negative externalities for neighbors and analyzes if market mechanisms can internalize these external costs through optimal building policies.

Contribution

It models the impact of tenant sorting and owner policies on the social efficiency of Airbnb hosting in apartment buildings.

Findings

Equilibrium allows socially efficient Airbnb policies when tenants can sort based on owner policies.

Tenant sorting can lead to optimal internalization of externalities.

Market mechanisms can potentially mitigate negative externalities of Airbnb.

Abstract

A commonly expressed concern about the rise of the peer-to-peer rental market Airbnb is that hosts---those renting out their properties---impose costs on their unwitting neighbors. I consider the question of whether apartment building owners will, in a competitive rental market, set a building-specific Airbnb hosting policy that is socially efficient. I find that if tenants can sort across apartments based on the owners policy then the equilibrium fraction of buildings allowing Airbnb listing would be socially efficient.