Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry
This study investigates the role of social networks in aligning the incentives of economic agents in settings with incomplete contracts. We study the New York City taxi industry where taxis are often leased and lessee-drivers have worse driving outcomes than owner-drivers as a result of a moral hazard associated with incomplete leasing contracts. Using instrumental variables and fixed-effects analyses, we find that: (1) drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard; (2) network effects appear to operate primarily via social sanctions; and (3) network benefits can help to explain the organization of the industry in terms of which drivers and owners form business relationships.
We would like to thank Andrew Salkin at the New York City Taxi and Limousine Commission for helpful discussions and data, Jonathan Peterson, Lan Shi, Michael Waldman, and various seminar participants for valuable comments, and James Cowan and Jonathan Peterson for excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Jackson, C. Kirabo, and Henry S. Schneider. 2011. “Do Social Connections Reduce Moral Hazard? Evidence from New York City Taxi Industry.” American Economic Journal: Applied Economics. 3 (July): 244267 citation courtesy of