The Hindu Business Line : Moral hazard and traffic discipline

Something profound (or so I thought) struck me the other day when I was travelling by auto. The driver was careful in manoeuvring the traffic. As he owned the vehicle, this led me to think that, perhaps, the traffic indiscipline was primarily because of the moral hazard problem. What does that mean?

Insurance and risk

Moral hazard is primarily related to the insurance business. It means people who have insurance will tend to take more risk than those who do not have one. The reason is because these persons do not bear the full consequences of the risk; the insurance company will.

The moral hazard problem is also argued as the reason why some banks provide high-risk loans; for a government bailout is highly likely if banks fail.

How is moral hazard related to traffic accidents? The argument is simple. You are likely to be more careful with your own car than if the car were provided to you by your employer.

It is the same with auto drivers. Most auto drivers run the vehicles on long-term rent from the owners. They are not as much interested in the “well-being” of the vehicle as the owners are. The result is that the drivers of the rented autos are more reckless than the owner-driven ones.

Owners more careful than renters

It is true of cars as well. You may have noticed yellow-board cars that try to pick gaps between your car and the one in front of you at a traffic signal — or worse still, when you are driving at 40 miles per hour. It is not to say that owner-drivers are always disciplined — just that they tend to be more careful than renters.

This was shown to be true in a recent study of New York City taxi drivers. Henry Schneider of Cornell University found that moral hazard is prevalent when taxi drivers lease the car than when they own it.

Logically then, would reducing the number of yellow-board cars and encouraging more auto drivers to own their vehicles pave way for disciplined traffic?

(The author is an investment strategist. blfeedback@thehindu.co.in)

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