Working Paper: NBER ID: w16279
Authors: C. Kirabo Jackson; Henry S. Schneider
Abstract: 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.
Keywords: moral hazard; social networks; New York City taxi industry; economic agents; incentives
JEL Codes: D52; D62; D64; D82; J01; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| drivers leasing from members of their country-of-birth community (F22) | reduced effects of moral hazard (G52) |
| strength of social ties (Z13) | increased monitoring and accountability among drivers (R48) |
| social ties mitigate moral hazard (Z13) | improved outcomes for in-network drivers (R48) |
| drivers and owners from the same country of birth (J61) | form business relationships (L14) |
| form business relationships (L14) | improved outcomes for in-network drivers (R48) |