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Congestion on risky routes with risk adverse drivers

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  • André De Palma

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  • Nathalie Picard

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Abstract

We study the impact of information on risk adverse drivers who maximize their von Neumann and Morgerstern expected utility (rather than minimizing expected travel time). The preferences of the users are described by their utility functions. Beside the (potentially inconsistent) mean variance model used so far in transportation, we consider three other standard utility functions: the mean standard deviation model, and the CARA and CRRA utility functions. We show that maximization of expected utility provides a more general formulation than minimization of expected travel time (the latter case corresponds to the standard Wardrop principle). We illustrate the proposed approach with a simple network which consists in one origin/one destination and two routes in parallel. Total demand is inelastic. Capacity on one route is constant and on the other route it is stochastic, and depends on the states of nature, with two possible values. We assume that all users have the same value of time but that they differ in their risk aversion parameter. Equilibrium travel time then depends on the distribution of risk aversion. We consider two polar information regimes: no information and full information. We study the differential impacts of information according to the level of risk aversion, and compute the social value of information. We introduce a formula to compute the value of information that is the individual willingness to pay for information (or in economic terms, the compensating variation). Moreover, we find that optimal route choice may depend on global factors (and not only on local traffic conditions). This has serious implications on the design of driver information systems. Finally, we study road pricing when users are risk neutral (and minimize the expected travel time) and when users are risk adverse. We compare the level of tolls, as well as the benefits of road pricing with and without taking into account risk aversion.

Suggested Citation

  • André De Palma & Nathalie Picard, 2005. "Congestion on risky routes with risk adverse drivers," ERSA conference papers ersa05p423, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa05p423
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    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa05/papers/423.pdf
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    References listed on IDEAS

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    1. Joop Hartog & Ada Ferrer-i-Carbonell & Nicole Jonker, 2000. "On a Simple Survey Measure of Individual Risk Aversion," Tinbergen Institute Discussion Papers 00-074/3, Tinbergen Institute.
    2. Richard Arnott, 1989. "Does Providing Information to Drivers Reduce Traffic Congestion?," Discussion Papers 864, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Richard Arnott & Andre De Palma & Robin Lindsey, 1993. "Information And Usage Of Free-Access Congestible Facilities," Boston College Working Papers in Economics 238, Boston College Department of Economics.
    4. de Palma, André & Picard, Nathalie, 2005. "Route choice decision under travel time uncertainty," Transportation Research Part A: Policy and Practice, Elsevier, vol. 39(4), pages 295-324, May.
    5. Daniel McFadden, 2001. "Economic Choices," American Economic Review, American Economic Association, vol. 91(3), pages 351-378, June.
    6. Noland, Robert B. & Small, Kenneth A. & Koskenoja, Pia Maria & Chu, Xuehao, 1998. "Simulating travel reliability," Regional Science and Urban Economics, Elsevier, vol. 28(5), pages 535-564, September.
    7. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, January.
    8. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1996. "Information and Usage of Free-Access Congestible Facilities with Stochastic Capacity and Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 181-203, February.
    9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    10. André de Palma & Nathalie Picard, 2006. "Route Choice Behaviour with Risk-Averse Users," Chapters,in: Spatial Dynamics, Networks and Modelling, chapter 7 Edward Elgar Publishing.
    11. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-154, Summer.
    12. David Levinson, 2003. "The Value of Advanced Traveler Information Systems for Route Choice," Working Papers 200307, University of Minnesota: Nexus Research Group.
    13. Camerer, Colin F, 1989. "An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
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