Monday, July 14, 2014

Of the Division of Tariffs

It is a consistent source of man's wonderment the many ways in which mutually felicitous exchange is made. Consider the curious case of the two-part tariff. A two-part tariff is when the customer pays a periodic fixed fee, often in exchange for lower piece-rates. Unless the firm is a protected monopoly, in which case the first part of the tariff (sometimes hidden in public expenditures) aids in the extraction of monopoly rents. Part of the recent dust-up between taxi organizations and ridesharing services have exposed something curious about the multi-part tariffs bound in livery.

The Dub-MOE and I hinted at some of the demands that Birmingham is mulling w.r.t. Uber, Lyft, Sidecar et al. Among them is a requirement for an extra $500k in liability coverage, borne by each driver.

The by-driver requirement specifically set my hackles up. I'm already alert to Yandle's Bootleggers & Baptists story, so I've a keen nose for mischief when it comes to pronunciations from professional taxi organizations, but the peculiar thing here is that while other aspects of taxicab livery could run like a protected (local) monopoly, it seems unusual that the insurance industry, itself highly protected via regulation should be complicit. In other words, why would taxicab companies not have full mutual insurance rather than piecemeal coverage?

Please recall that the purpose of insurance is to guard against idiosyncratic risk. For ordinary drivers, this means pooling with all other drivers of your type and based on many long years of ongoing statistical analysis, with careful retrospective studies of relevant characteristics, you protect your own private assets against adversity. But for taxi services? The residual claimant should be the one footing the insurance bill. The regulatory kayfabe I've been hearing from taxi associations are all aimed at protecting the interests of the customer, and I can't for the life of me understand why this should place an extra burden specifically on the drivers. In a suit, the firm would be named as primary litigant (Ken can correct me if I'm wrong here, I know he secretly reads EE, even if he'll deny it till he's blue in the face). So the histrionics about drivers getting extra coverage must have something else under it, otherwise it'd be transparent rent protection, and even Florida sugar cartels have more sense than that.

So is there a behavioral reason? Perhaps part of the point of lading drivers with their own insurance payments is for the "Peltzman Effect", in which risk abatement is greeted with marginally riskier behavior. The standard image for this can be found at Eric Crampton's blog Offsetting Behaviour—a steering wheel with a spike sticking out of it is one way to get drivers to compensate for all those wonderful airbags that surround and cushion them. Theoretically, if someone else is picking up the tab in case you get in a wreck with a passenger in the back, you'll be (again, marginally) more inclined to take a chance on a freshly-red light, or to text your sweetie behind the wheel, etc. But this is, of course, ultimately an empirical claim, and the subjects under study for the original Peltzman Effect literature weren't Uber drivers: they didn't have the countervailing effects of driver rating systems. Direct customer feedback can more easily match passengers' risk tolerance to the specific circumstances of the road on that particular day. It's a curious conceit to claim that there's a public interest in this small-scale negotiation, other than the safety of other drivers and pedestrians (beyond existing statutes against reckless endangerment, that is).

So what do you think? Is it reasonable to insist on additional two-part tariffs for Uber drivers or is the indemnity insurance already offered by the firm sufficient? Why or why not? How would you test the claim? Please show your work.


  1. I'd expect that the firm-offered indemnity insurance should suffice.

    Even in the case where there are some passengers who pay no attention at all to driver ratings (or who perhaps even prefer the ones who'll run red lights), the firm does see the ratings and would be trying to keep its premiums down by booting dodgy drivers.

    Perhaps the worry from incumbent drivers is that monitoring by Uber will be stricter than monitoring by the usual insurance mechanisms (how many speeding tickets, etc) and so could draw the better drivers into the better-monitored regime if insurance costs are high?

    1. That's a good point. And a good idea for a paper: Schelling Effects in Livery Markets, Theory and Evidence.

      I like it.


Do you have suggestions on where we could find more examples of this phenomenon?