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

55 Pages Posted: 24 Aug 2010

See all articles by C. Kirabo Jackson

C. Kirabo Jackson

Cornell University - Department of Labor Economics

Henry S. Schneider

Smith School of Business, Queen's University

Date Written: August 2010

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.

Suggested Citation

Jackson, C. Kirabo and Schneider, Henry S., Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry (August 2010). NBER Working Paper No. w16279, Available at SSRN: https://ssrn.com/abstract=1662273

C. Kirabo Jackson (Contact Author)

Cornell University - Department of Labor Economics ( email )

Ithaca, NY 14853
United States

Henry S. Schneider

Smith School of Business, Queen's University ( email )

143 Union Street
Kingston, Ontario
Canada

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