Minimum Earnings Regulation and the Stability of Marketplaces

Abstract

Problem definition: New York City and Seattle recently enacted minimum earnings regulations for ride-hailing providers that are based on their utilization rates. The regulations are intended to deliver minimum earnings while preserving the flexibility of the independent contractor model of work. Academic/practical relevance: This kind of regulation has the potential to impact marketplace stability, which we define as the ability of platforms to keep wages bounded while maintaining the current flexible (free-entry) work model. Methodology: We build a theoretical model to study the marketplace implications of this kind of regulation and identify precise conditions under which a utilization-based minimum earnings rule causes marketplace instability. We then calibrate our model using publicly available data, showing the extent to which the law can (or cannot) increase earnings while preserving both worker flexibility and marketplace stability. Results: For reasonable ranges of supply and demand elasticity, the law’s ability to increase earnings while maintaining the free-entry work model is quite limited, and even when earnings increases are achievable, they cause significant increases in driver idleness. Managerial implications: Given the law’s potential to cause instability, affected ride-hailing companies may need to respond to the law by reducing driver flexibility to limit supply. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.1150 .