Working Paper: NBER ID: w27300
Authors: Giulia Brancaccio; Myrto Kalouptsidi; Theodore Papageorgiou; Nicola Rosaia
Abstract: In this paper we explore efficiency and optimal policy in decentralized transportation markets that suffer from search frictions, such as taxicabs, trucks and bulk shipping. We illustrate the impact of two externalities: the well-known thin/thick market externalities and what we call pooling externalities. We characterize analytically the conditions for efficiency, show how they translate into efficient pricing rules, as well as derive the optimal taxes for the case where the planner is not able to set prices. We use our theoretical results to explore welfare loss and optimal policy in dry bulk shipping. We find that the constrained efficient allocation achieves 6% welfare gains, while the first-best allocation corresponding to the frictionless world, achieves 14% welfare gains. This suggests that policy can achieve substantial gains, even if it does not alleviate search frictions, e.g. through a centralizing platform. Finally, we demonstrate that simple policies designed to mimic the optimal taxes perform well.
Keywords: search frictions; transportation markets; efficiency; optimal policy; welfare gains
JEL Codes: F1; L91; R48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions (F12) | inefficiencies (D61) |
| search frictions (F12) | thin-thick market externalities (D49) |
| search frictions (F12) | pooling externalities (H23) |
| constrained efficient allocation (D61) | 6% welfare gains (D69) |
| first-best allocation (D61) | 14% welfare gains (D69) |
| optimal taxes (H21) | restore efficiency (D61) |
| tax on searching carriers and customers (H26) | equate private and social values (D46) |
| simple policies (G52) | improve market efficiency (G14) |