Consider the following abstract from the following research paper “Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry” by C. Kirabo Jackson and Henry Schneider: “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 [like gas overuse and accidents] than owner-drivers due to moral hazard… We find that drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard, representing an improvement… of the outcome measures.” 1. Thinking of moral hazard, draw an analogy between the taxi leasing industry and health insurance. Specifically, briefly highlight the following aspects Price distortion effects Behaviour change due to price sensitivity Information asymmetry
Consider the following abstract from the following research paper “Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry” by C. Kirabo Jackson and Henry Schneider:
“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 [like gas overuse and accidents] than owner-drivers due to moral hazard… We find that drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard, representing an improvement… of the outcome measures.”
1. Thinking of moral hazard, draw an analogy between the taxi leasing industry and health insurance. Specifically, briefly highlight the following aspects
Price distortion effects- Behaviour change due to price sensitivity
- Information asymmetry
- Social loss
2. The paper finds that moral hazard is reduced when lessor and lessee share a country of birth (NYC taxi industry is mostly comprised of immigrants). How might country-of-birth effects reduce moral hazard (e.g., come up with a story/mechanism)?
3. The study finds that the effect in b) might be due to social sanctions against drivers with bad outcomes. Does this mechanism operate through price distortions, price sensitivity, or information asymmetry?
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