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

• Published in: American economic journal. Applied economics Vol. 3; no. 3; pp. 244 - 267
• Main Authors: Jackson, C. Kirabo, Schneider, Henry S.
• Format: Journal Article
• Language: English
• Published: American Economic Association 01-07-2011
• Subjects: Accidents; Applied economics; Bias; Costs; Country of birth; Instrumental variables estimation; Leases; Leasing; Moral hazard; Moral hazard models; Municipal taxes; Network effects; Sanctions; Social networking; Social networks; Summonses; Taxicabs
• ISSN: 1945-7782; 1945-7790
• DOI: 10.1257/app.3.3.244

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.