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Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry

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  • C. Kirabo Jackson
  • Henry S. Schneider

Abstract

This study investigates the role of social networks in aligning the incentives of agents in settings with incomplete contracts. Specifically, the study examines the New York City taxi industry where taxis are often leased and lessee-drivers have worse driving outcomes than owner-drivers due to moral hazard. Using within-driver variation and instrumental variable strategies to remove selection, we find that drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard, representing an improvement of almost one-half of a standard deviation of the outcome measures. Screening is ruled out as an explanation, and other mechanisms are investigated. (JEL D82, D86, L92, Z13)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.3.3.244
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File URL: http://www.aeaweb.org/aej/app/app/2010-0200_app.pdf
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 3 (2011)
Issue (Month): 3 (July)
Pages: 244-67

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Handle: RePEc:aea:aejapp:v:3:y:2011:i:3:p:244-67

Note: DOI: 10.1257/app.3.3.244
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References

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  1. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 815-842, August.
  2. Markus Mobius & Adam Szeidl, 2007. "Trust and Social Collateral," NBER Working Papers 13126, National Bureau of Economic Research, Inc.
  3. Orana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social preferences and the response to incentives: Evidence from personnel data," Natural Field Experiments 00212, The Field Experiments Website.
  4. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
  5. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2009. "Social Connections and Incentives in the Workplace: Evidence From Personnel Data," Econometrica, Econometric Society, vol. 77(4), pages 1047-1094, 07.
  6. Xavier Gine & Dean Karlan, 2006. "Group versus individual liability: A field experiment in the philippines," Natural Field Experiments 00253, The Field Experiments Website.
  7. Kaivan Munshi, 2003. "Networks In The Modern Economy: Mexican Migrants In The U.S. Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 549-599, May.
  8. Erzo F. P. Luttmer, 2001. "Group Loyalty and the Taste for Redistribution," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 500-528, June.
  9. C. Kirabo Jackson & Elias Bruegmann, 2009. "Teaching Students and Teaching Each Other: The Importance of Peer Learning for Teachers," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 85-108, October.
  10. Åslund, Olof & Edin, Per-Anders & Fredriksson, Peter, 2001. "Ethnic Enclaves and the Economic Success of Immigrants - Evidence from a Natural Experiment," CEPR Discussion Papers 2729, C.E.P.R. Discussion Papers.
  11. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  12. Michele Pellizzari, 2010. "Do Friends and Relatives Really Help in Getting a Good Job?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(3), pages 494-510, April.
  13. Karlan, Dean & Gine, Xavier, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 61, Yale University, Department of Economics.
  14. Henry Schneider, 2010. "Moral Hazard in Leasing Contracts: Evidence from the New York City Taxi Industry," Journal of Law and Economics, University of Chicago Press, vol. 53(4), pages 783 - 805.
  15. Ricard Gil & Wesley R. Hartmann, 2011. "Airing Your Dirty Laundry: Vertical Integration, Reputational Capital, and Social Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 27(2), pages 219-244.
  16. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  17. W. Bruce Wydick, 1999. "Credit access, human capital and class structure mobility," Journal of Development Studies, Taylor & Francis Journals, vol. 35(6), pages 131-152.
  18. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
  19. C. Kirabo Jackson, 2010. "Match Quality, Worker Productivity, and Worker Mobility: Direct Evidence From Teachers," NBER Working Papers 15990, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Brogaard, Jonathan & Engelberg, Joseph & Parsons, Christopher A., 2014. "Networks and productivity: Causal evidence from editor rotations," Journal of Financial Economics, Elsevier, vol. 111(1), pages 251-270.
  2. Raymond Fisman & Daniel Paravisini & Vikrant Vig, 2012. "Cultural Proximity and Loan Outcomes," Working Papers id:5036, eSocialSciences.
  3. Gazda Vladimir & Malikova¡ Zuzana & Kubak Matus & Grof Marek, 2012. "Double Oral Auctions And Tendencies Toward Moral Hazard," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 207-213, December.
  4. Loukas Balafoutas & Rudolf Kerschbamer & Matthias Sutter, 2013. "Second-Degree Moral Hazard in a Real-World Credence Goods Market," CESifo Working Paper Series 4458, CESifo Group Munich.
  5. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer, vol. 38(4), pages 363-386, June.
  6. Berardi, Nicoletta, 2009. "The Remains of Informality in the Formal Sector: Social Networks and Wages in Senegal's Labor Market," TSE Working Papers 09-129, Toulouse School of Economics (TSE).
  7. C. Kirabo Jackson & Henry S. Schneider, 2013. "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay," NBER Working Papers 19645, National Bureau of Economic Research, Inc.
  8. Wen Fan, 2011. "School Tenure and Student Achievement," Working Papers 201124, School Of Economics, University College Dublin.

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