Does the use of digital platforms reduce moral hazard?

An interesting research paper by Meng Liu, Erik Brynjolfsson and Jason Dowlatabadi about the reduction of moral hazard due to digital platforms. We see a rapid change in the way we book services and buy products, not just due to Covid. The chance for people to rate services in real time is nowadays available to everyone- even the delivery service can be rated. Is the postman putting the package in front of the door? I give it one star. The Uber driver’s car appears to be very clean? Five stars! Transparency is maintained between all users. It begs the question, how ethical is this? Does this reduce moral concerns or discourage too much monitoring? The quality and honesty of the drivers are also questioned here: Do taxi drivers drive longer routes in order to increase the price? This would be less likely for Uber drivers as they are fully transparent. In order to answer this question, the authors compare the New York taxi market with the Uber market. 

Taxi drivers, based on the results from the study, tend to drive longer routes, especially for airport trips and trips with non-local passengers, and thus do not act in a morally correct manner. In the case of Uber-drivers, this is different. Generally, the driver does not extend the route. As demonstrated in the authors’ theoretical model, uber pricing and transparency can increase drivers’ morale. However, taxi drivers’ lack of use of navigation devices remains an uncertain component. A taxi driver is more likely to drive by memory and experience than an uber driver who always takes the fastest route. However, whether this could explain the significant price differences is debatable. 

As a result, disruptive technologies can raise morale by removing opportunities for immoral behavior. Till now, drivers were able to choose between Uber and taxis. Therefore, the monitoring aspect of the driver could be neglected. However, it is important to think about the opportunities for end users, namely a fair ride at transparent prices! Technology of this type can also be used to mitigate tax fraud and black markets. In the study, no user ratings were examined, but the effects of user ratings may also influence driving behavior. It is quite possible that the fear of being exposed for non-moral behavior may lead to a change in behavior both on the driver and passenger side. Additionally, the possibility of the passenger rating can have effects: If a passenger has 5 stars, it can be assumed that the tip is exceptionally high. Therefore, some passengers are selected over others as pick-ups: But how moral might that be?

My learning could be your learning:

  1. A digital platform can reduce moral hazard.
  2. Our famous economic models are less realistic because they assume perfect information: With the rise of digital platforms, we are moving closer to a world without asymmetric information. This can be helpful in understanding and predicting human behavior better.
  3. In my personal opinion, ratings of services are a good thing if users and suppliers know how to use them and implement mechanisms to detect and punish unmoral behavior. A driver for example should not be ranked less god because of his nationality, because his car is blue and not red, or simply because he didn’t like the conversation. These are the things where we need some governance and control mechanisms!

Download the paper here: https://www.nber.org/system/files/working_papers/w25015/w25015.pdf

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