Default Rules Beyond a State: Special-Purpose Lawmakers in the Platform Economy

Abstract

The paper addresses the phenomenon of default rules created by private entities for other market actors (with a special focus on online intermediary platforms acting in the sharing economy, such as eBay, Airbnb and Amazon). The rule makers in question produce a normative framework for fractioned communities of contractors, who conclude “horizontal” agreements, using the regulatory and institutional framework established by the platform. Some of the rules created in this way have various degrees of optionality. In other words, they are shaped as typical default rules, which can be contracted around by their addressees (i.e. clients and suppliers). Observation of normative schemes produced by platforms provides many instances of both “simple” default rules and “menus”. Rules of this kind play a predominantly utility-enhancing role, as they allow parties to shape the idiosyncratically selected details of their relation. This applies both to default rules which operate on an opt-out basis (as gap-fillers for contracts between clients and suppliers), as well as to those that need to be proactively opted-in to (e.g. by choosing one of the elements of a menu). Sometimes, default rules are also used to steer the behavior of platform members, operating as nudges (e.g. in queuing schemes recently applied by Uber). Rules of this kind are based on a particular preferences paradox. On the one hand, by establishing those rules, online platforms principally aim to maximize their own utility (for instance, by enhancing the efficiency of particular “horizontal” contracts, increasing the volume of transactions by attracting new members with a more flexible regulatory design). On the other hand, however, by doing so platforms act also for the benefit of the entire community of clients and suppliers. Therefore, privately-created default rules may – under certain premises, which the text tries to further frame and explore – approximate the classic defaults established by a state, and hence contribute to overall social welfare. The existence of default rules created by platforms also poses a question of possible regulatory intervention. Rules of this sort can undoubtedly generate several negative externalities. In particular, their shape can limit or channel the choices made by clients or suppliers, making them sub-optimal. Secondly, inequality of bargaining power, which is a common feature of client-supplier relations, can skew the operation of default rules, ultimately diminishing the efficiency of an agreement. In particular, it seems justifiable to introduce regulatory instruments that would enhance the honesty and efficiency of those rules for both parties, mitigating the risk that cognitive constraints might be exploited to benefit one side excessively or disproportionately.