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American Economic Journal: Applied Economics: Vol. 3 No. 3 (July 2011)

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

Article Citation

Jackson, C. Kirabo, and Henry S. Schneider. 2011. "Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry." American Economic Journal: Applied Economics, 3(3): 244-67.

DOI: 10.1257/app.3.3.244

Abstract

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. (JEL D82, D86, L92, Z13)

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Authors

Jackson, C. Kirabo (Northwestern U)
Schneider, Henry S. (Cornell U)

JEL Classifications

D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
L92: Railroads and Other Surface Transportation
Z13: Economic Sociology; Economic Anthropology; Social and Economic Stratification

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