IDEAS home Printed from https://ideas.repec.org/p/net/wpaper/0520.html
   My bibliography  Save this paper

Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles

Author

Listed:

Abstract

The paper examines a class of phenomena that combine adverse network effects with moral hazard, using the motor vehicle market as an example to develop and illustrate the key concepts. It is hypothesized that consumers behave as if there is a network externality with respect to vehicle size: the more large vehicles there are on the roads, the greater a consumer’s propensity to seek protection from them by driving a large vehicle herself. One consequence of this is that motor vehicle manufacturers are discouraged from making large vehicles less hazardous to other motorists. The paper measures the network effect and consequent moral hazard using disaggregate data on choice of vehicle type and related household characteristics, combined with a state-level measure of the incidence of traffic fatalities. The results show that for each 1 million light trucks that replace cars, between 961 and 1,812 would-be car buyers decide to buy a light truck instead, in reaction to the increased risk of death posed by the incremental light trucks. This network effect, when run in reverse, creates egregious incentives for vehicle manufacturers: for every life saved due to safety innovations that make light trucks less deadly to other motorists, manufacturers can expect to sell about 31 fewer light trucks.

Suggested Citation

  • Matthew G. Nagler, 2005. "Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles," Working Papers 05-20, NET Institute, revised Oct 2005.
  • Handle: RePEc:net:wpaper:0520
    as

    Download full text from publisher

    File URL: http://www.netinst.org/Nagler.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-712, September.
    2. Ted Gayer, 2004. "The Fatality Risks of Sport-Utility Vehicles, Vans, and Pickups Relative to Cars," Journal of Risk and Uncertainty, Springer, vol. 28(2), pages 103-133, March.
    3. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 963-1002.
    4. Chao, Angela & Schor, Juliet B., 1998. "Empirical tests of status consumption: Evidence from women's cosmetics," Journal of Economic Psychology, Elsevier, vol. 19(1), pages 107-131, February.
    5. White, Michelle J, 2004. "The "Arms Race" on American Roads: The Effect of Sport Utility Vehicles and Pickup Trucks on Traffic Safety," Journal of Law and Economics, University of Chicago Press, vol. 47(2), pages 333-355, October.
    6. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-348, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Network Externalities; Moral Hazard; Highway Safety; Discrete Choice Models;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:net:wpaper:0520. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides). General contact details of provider: http://www.NETinst.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.