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

  • C. Kirabo Jackson
  • Henry S. Schneider

This study investigates the role of social networks in aligning the incentives of economic agents in settings with incomplete contracts. We study the New York City taxi industry where taxis are often leased and lessee-drivers have worse driving outcomes than owner-drivers as a result of a moral hazard associated with incomplete leasing contracts. Using instrumental variables and fixed-effects analyses, we find that: (1) drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard; (2) network effects appear to operate primarily via social sanctions; and (3) network benefits can help to explain the organization of the industry in terms of which drivers and owners form business relationships.

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File URL: http://www.nber.org/papers/w16279.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16279.

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Date of creation: Aug 2010
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Publication status: published as Jackson, C. Kirabo, and Henry S. Schneider. 2011. “Do Social Connections Reduce Moral Hazard? Evidence from New York City Taxi Industry.” American Economic Journal: Applied Economics. 3 (July): 244­267
Handle: RePEc:nbr:nberwo:16279
Note: LE LS PE
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  1. Xavier Gine & Dean Karlan, 2006. "Group versus Individual Liability: A Field Experiment in the Philippines," Working Papers 940, Economic Growth Center, Yale University.
  2. 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.
  3. Markus Mobius & Adam Szeidl, 2007. "Trust and Social Collateral," NBER Working Papers 13126, National Bureau of Economic Research, Inc.
  4. C. Kirabo Jackson, 2013. "Match Quality, Worker Productivity, and Worker Mobility: Direct Evidence from Teachers," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1096-1116, October.
  5. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  7. 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.
  8. Erzo F.P. Luttmer, 1999. "Group Loyalty and the Taste for Redistribution," Working Papers 9902, Harris School of Public Policy Studies, University of Chicago.
  9. Per-Anders Edin & Peter Fredriksson & Olof �slund, 2003. "Ethnic Enclaves And The Economic Success Of Immigrants - Evidence From A Natural Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 329-357, February.
  10. Imran Rasul & Iwan Barankay & Orana Bandiera, 2005. "Social preferences and the response to incentives: Evidence from personnel data," Natural Field Experiments 00212, The Field Experiments Website.
  11. 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.
  12. 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.
  13. 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.
  14. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2009. "Social Connections and Incentives in the Workplace: Evidence from Personnel Data," CEPR Discussion Papers 7114, C.E.P.R. Discussion Papers.
  15. 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.
  16. 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.
  17. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  18. 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.
  19. Xavier Giné & Dean Karlan, 2009. "Group versus Individual Liability: Long Term Evidence from Philippine Microcredit Lending Groups," Working Papers 970, Economic Growth Center, Yale University.
  20. 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.
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