Taxi drivers overcharge when passengers are on expenses

MORAL hazard is a problem that crops up frequently in economics. People behave differently if they do not face the full costs or risks of their actions: deposit insurance makes customers less careful about choosing their banks, for example.

Moral hazard can also be second-hand. Take medicine. A patient with private insurance may be happy to sit through extra tests, and a doctor may be happy to order them. Doctors might be more reluctant to order tests if they know that the patient would bear the full cost.

A newly published paper* sets out to test this secondary problem by examining a common-enough situation—taking a taxi ride in a strange city. The authors, a trio of academics at the University of Innsbruck, sent researchers on 400 taxi rides, covering 11 different routes, in Athens, Greece. In all cases, the researchers indicated they were not familiar with the city. But in half the cases, the researchers indicated that their employers would be reimbursing them for the journey. The researchers in the latter group were 17% more likely to be overcharged for their trip and paid a fare that was, on average, 7% higher.

The most common form of overcharging was not, as might be expected, taking a longer route. People on expenses may be less concerned about the cost of a ride but they still care how long it takes. Instead, passengers were subject to bogus surcharges (a fee for airport pickup, for example) or charged the night-time fare in the daytime.

There was also a difference between the way that taxi drivers treated different sexes. Women were overcharged more frequently than men. But they were overcharged whether or not the driver knew they were travelling on expenses (the difference between the extent of overcharging was not statistically significant). Drivers may be tempted to overcharge, the authors believe, because members of the higher-fare sex are less likely to complain.

* “Second-Degree Moral Hazard in a Real-World Credence Goods Market” by Loukas Balafoutas, Rudolf Kerschbamer and Matthias Sutter, The Economic Journal, February 2017