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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)

Suggested Citation

  • C. Kirabo Jackson & Henry S. Schneider, 2011. "Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 244-267, July.
  • 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 listed on IDEAS

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    Cited by:

    1. Deepti Goel & Kevin Lang, 2009. "Social Ties and the Job Search of Recent Immigrants," NBER Working Papers 15186, National Bureau of Economic Research, Inc.
    2. Wen Fan, 2011. "School tenure and student achievement," Working Papers 201124, School of Economics, University College Dublin.
    3. Brit Grosskopf & Graeme Pearce, 2016. "Do you mind me paying less? Measuring Other-Regarding Preferences in the Market for Taxis," Natural Field Experiments 00556, The Field Experiments Website.
    4. Nicoletta Berardi, 2013. "Social networks and wages in Senegal’s labor market," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-26, December.
    5. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer;The Industrial Organization Society, 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. 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.
    8. Raymond Fisman & Daniel Paravisini & Vikrant Vig, 2017. "Cultural Proximity and Loan Outcomes," American Economic Review, American Economic Association, vol. 107(2), pages 457-492, February.
    9. Loukas Balafoutas & Rudolf Kerschbamer & Matthias Sutter, 2017. "Second‐Degree Moral Hazard In A Real‐World Credence Goods Market," Economic Journal, Royal Economic Society, vol. 127(599), pages 1-18, February.
    10. C. Kirabo Jackson & Henry S. Schneider, 2011. "Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 244-267, July.
    11. 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.
    12. Haselmann, Rainer & Schoenherr, David & Vig, Vikrant, 2017. "Rent-seeking in elite networks," SAFE Working Paper Series 132, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. Kareem Haggag & Brian McManus & Giovanni Paci, 2017. "Learning by Driving: Productivity Improvements by New York City Taxi Drivers," American Economic Journal: Applied Economics, American Economic Association, vol. 9(1), pages 70-95, January.
    14. 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.
    15. Ilse Lindenlaub & Anja Prummer, 2016. "Gender, Social Networks and Peformance," Working Papers 807, Queen Mary University of London, School of Economics and Finance.
    16. David C. Chan, Jr., 2015. "The Efficiency of Slacking Off: Evidence from the Emergency Department," NBER Working Papers 21002, National Bureau of Economic Research, Inc.
    17. Frechette, Guilaume & Lizzeri, Alessandro & Salz, Tobias, 2016. "Frictions in a Competitive, Regulated Market Evidence from Taxis," CEPR Discussion Papers 11626, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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