Digital Platforms and Moral Hazard Reduction

The rise of digital platforms pose both new opportunities and challenges. On the one hand, digital platforms have digitalized transactions for previously “offline only” services, thereby increasing market transparency, real-time monitoring, enabling ratings of both buyers and sellers and providing a low-cost complaint channel. These benefits help reduce asymmetric information and therefore, improves market efficiency. However, on the other hand, a few challenges come with the increased usage of digital platforms. For example, understanding online-offline competition, welfare in digital markets and how to properly design a digital platform to improve markets with significant moral hazard.

Liu et al., (2021) seek to answer “Do digital platforms reduce moral hazard and improve service quality, compared with traditional settings?”. To do so, the researchers compare Uber, a digital platform, with taxis, the traditional, offline-market to understand the relationship between technology and incentive design. Incentive design is important for reducing moral hazard, which arises due to asymmetric information. A question central to this topic is whether technology and digital platforms, which have benefits that reduce asymmetric information, reduce moral hazard. The researchers specifically analyze “driver detour”, which they define as “the extra distance a driver adds to the fastest route” (Liu et al., 2021, p. 4665) to compare if there are any differences in driver detour for Uber drivers versus traditional taxi drivers for several settings. The taxi market is chosen to analyze this relationship between technology and incentive design because this competitive market has a homogenous good and provides plenty of spatial data.

Combining data from NYC Yellow Medallion taxi trip records with UberX trip records for January to June 2016 and for July to December 2013, Liu et al., (2021) investigate and compare short trips in dense markets (i.e. a trip within Manhattan) and airport trips from Manhattan to JFK Airport for metered and fixed-price trips. Further, the researchers compare these trips for when passengers are locals versus non-locals.

Their main finding is that taxi drivers, compared to Uber drivers, tend to take more detours for metered trips to the airport, particularly when a passenger is a non-local. Extra detours do not seem to be taken for airport trips that are fixed-rate or for short trips within Manhattan.

Works Cited

Liu, M., Brynjolfsson, E., & Dowlatabadi, J. (2021). Do digital platforms reduce moral hazard? The case of Uber and taxis. Management Science, 67(8), 4665-4685.