High Price During High Tide: The Shared Economy and Natural Disasters

During the hurricanes in Texas and Florida last year, we saw countless displays of great generosity. People helped strangers escape from their homes, collected food and supplies for the displaced, and welcomed their neighbors into their homes. We saw how technology helped people connect and coordinate.

We also saw an interesting initiative by Airbnb. They allowed people in certain areas that were deeply affected by the hurricanes to offer up their homes for free to people in need. Hundreds of people in Texas, Florida, and other states let strangers in desperate situations stay in their homes. This is both a laudable action and an example of how technology can facilitate charity.

These services have an important role to play during a disaster. However, if we really want to harness their power, it may be the homes that are available for a price, rather than for free, that will really make a difference.

Airbnb and services like it expand the pool of homes, vehicles, and other commodities that are available for a price at any given time. During a disaster, when some of the existing infrastructure is destroyed, Airbnb easily allows people to make their homes or spare rooms available for rent, to flexibly change prices, and to choose when to make these spaces available.

How the sharing economy expands supply

Thanks to Airbnb, we can easily rent all or part of our home to complete strangers. It uses references and handles payments and damage liabilities, reducing the cost homeowners face to enter the market. This decrease in cost of entry expands the supply of available accommodation, reducing prices.

What happens to Airbnb during a natural disaster?

Three things can happen with Airbnb prices in a natural disaster. First, the supply may be depressed because some of the homes that would have been available may be damaged. Second, there may be an increase in demand, as individuals’ homes are damaged and they need to find a new place to stay. Finally, people will offer their homes for free because they want to help when people are desperately in need. As has been mentioned above, Airbnb facilitated the third form of behavior during Hurricanes Irma and Maria.

Is price flexibility good or bad?

Let’s consider the case of two hypothetical renters near Houston: Angela and Carlos, who own similar homes with a spare room, but have different levels of comfort about renting the room to a stranger.

Angela would be willing to rent a spare room for $50. A lot of people would rent her room for this price, so her vacancy is usually filled.

When a hurricane hits Houston, Angela realizes that people will be looking for accommodation. They would be willing to pay more for her spare room because they have not been able to shop around or plan in advance, and all the cheap rooms will be taken. Therefore, Angela takes the morally questionable step of doubling her price to $100 per night.

Carlos, on the other hand, does not like having strangers in his home, but is willing to put up with them for a good amount of money. He posts a price of $100 per night for his spare room, which is, therefore, usually vacant.

When a hurricane hits Houston, Carlos’ spare room is suddenly in high demand. The total number of spare rooms that people can rent has increased due to the rise in price.

The disadvantage from price flexibility is that it allows people who would have rented rooms for a low price to make a quick buck from the misfortune of others. The advantage is that some rooms that would not have been available during normal circumstances are now available thanks to the higher prices.

We might ask: Is there a role for policy to prevent people like Angela from exploiting people’s misfortune while still encouraging Carlos to rent his spare room during a natural disaster?

Price freeze during a disaster

If we are really concerned about Angela’s behavior, we could keep her from raising her price during a disaster. Airbnb could do this by blocking existing listings from increasing their prices once a disaster has been declared. This would keep Angela from increasing her price and taking money from victims of a natural disaster. In addition, Carlos’ home would become available if demand were to climb.

We want to make sure that it’s possible to enter and exit the listing market easily. Angela may want to take her spare room off the market during the disaster because she is going to lend the spare room to friends who have been affected.

Second, there could be opportunistic people who decide to enter the market when they realize that the rental prices are going to be high. We may be upset at these people trying to make money from a bad situation, yet, remember that their action is in effect expanding available space.

A price cap like this may be difficult to implement, and there may be better ways to ensure that enough housing is available during a disaster without making those who lost their homes pay very high prices. For example, local governments could consider paying some home-owners a small amount on a monthly basis in exchange for the ability to claim some space during a rare natural disaster. Whatever the challenge, these types of technology create a database of available lodgings in a city that would otherwise not have been available. It is too good of an opportunity to waste.


Image courtesy of Flickr. Originally published by S&S on May 10, 2018.

Related posts