Research Reports: April 4, 2011
Markets Can Ease the Food Crisis
With proper incentives, developing nations can profit from higher prices.
by Craig J. Richardson, PhD, Visiting Research Fellow
Higher Tax Rates Won’t Fix Deficits
History has shown that increasing the tax burden of the rich would have little impact on cutting the deficit. Instead, it slows growth.
by Julie Ni Zhu, Research Intern
Ask the Expert: Health Savings Accounts
by Kevin T. McGrath, CPA, a tax partner with BST Advisors, LLC.
Business-Cycle Conditions, April 2011
The Consumer Returns, But Timidly
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow
RR20110404
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History has shown that increasing the tax burden of the rich would have little impact on cutting the deficit. Instead, it slows growth.
by Julie Ni Zhu, Research Intern
Ask the Expert: Health Savings Accounts
by Kevin T. McGrath, CPA, a tax partner with BST Advisors, LLC.
Business-Cycle Conditions, April 2011
The Consumer Returns, But Timidly
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow
RR20110404
[js-disqus]
No items found
People are spending more and cautiously borrowing. But no clear engine of growth has emerged to drive the still-modest recovery.
by Polina Vlasenko, PhD, Research Fellow RR20110404
Related Articles –
The Economics of Hitchhiking
As I argued in my book Tomorrow 3.0, there is a lot of excess capacity in durable commodities in modern economies. We pay for everything twice, first to buy it and then to store it so that no one else can use it. Locked doors, parking lots, closets: it’s very inefficient. The alternative to having to lock stuff up is to reduce the transaction costs of sharing. The three categories of transaction costs, I argued, were triangulation (find each other, reach an agreement), transfer (agree on payment, and make delivery), and trust (ensure safety and honesty).
One of the most glaring examples is all those empty seats of cars and trucks sitting in huge traffic jams in our cities every morning and evening rush hour. Long ago, there was a system for using some of that excess capacity, on a kind of charity basis. It was called “hitchhiking,” beginning in the 1920s when cars were first beginning to travel long distances between cities. It works in transaction-costs terms, or rather in terms of the types of transaction costs I lay out in the book.
Triangulation: The passenger and the driver needed to find each other, to communicate where the passenger wanted to go, and where the driver was headed. They needed to arrange a time and location for the pick-up; that time and location had to be convenient for both (not far from the passenger, and on the route the driver was going to be traveling anyway). Hitchhikers used a simple but not very convenient system: find a road that goes (more or less) in the general direction of the desired destination, stand on the side of the road heading that direction, and then stand by the road and indicate the “demand” for a ride by holding out your hand with the fingers closed but the thumb sticking up.
Transfer: Both the driver and the passenger have to be able to go where they want to go, at the time they want to go. But this is hard to coordinate. Also, the driver might be more willing to pick someone up if the passenger could pay even a small amount. But arranging the payment, and the amount of the payment, and the process of making payment are not easy. Generally, hitchhiking was free, though the passenger might offer to make a token payment to share the cost of gas if the shared journey was long.
Trust: Trust, or the “creepiness” factor, is the central reason why hitchhiking is so rare in the US. Traditionally, the triangulation problem was solved by standing by the road with a thumb up, announcing the desire for a ride. And transfer was solved by having the rider stand on an entry ramp or by the side of the road in the direction of the desired destination. Those aren’t great solutions, but they worked well enough that hitchhiking was fairly common, reasonably efficient, and very cheap as a way of traveling.
As Steve Levitt put it, on the Freakanomics radio show:
Hitchhiking is a classic example of what an economist would call a matching market where there’s a person who wants a ride, and there’s a person who’s willing to give a ride, and typically no money changes hands, so somehow there are people getting a benefit on each side of the transaction. In the fifties, the sixties, and maybe even the seventies, there was some sort of equilibrium in which there was a set of people who wanted to hitchhike, and there was a set of people who were willing to pick them up. And somehow that equilibrium got destroyed. So the question is what happened to the equilibrium?
The answer is actually not clear. There was the “bad hitchhiker” in fiction, as in the movie Texas Chainsaw Massacre. There was the “rapist driver” in reality, as in the bizarre case of Colleen Stan, imprisoned and tortured from 1977 to 1984. In terms of objective probabilities, there is little evidence that hitchhiking became much more dangerous. But “trust,” or the lack of it, is likely one of the factors that clearly increased the perceived transaction costs of hitchhiking, which became much less frequent. Instead of trying to hitchhike, travelers used other systems. And instead of picking up hitchhikers, drivers rode alone.
In many countries, especially in Europe, there is an app designed to mitigate the high transaction costs of hitchhiking: BlaBlaCar. Unlike many other software platforms, BlaBlaCar offers pure sharing. The software provides key pieces of information: (1) the passenger’s location, (2) the passenger’s destination, (3) the time the passenger wants to leave, and (4) how much the passenger (and, ultimately, the matched driver) wants to talk.
Someone who has an extra seat in their car or truck and who is traveling that route at about that time is matched with the passenger. The passenger pays part of the cost of the trip that the driver is going to take anyway. The result is a pure efficiency gain with close to zero marginal cost to the system but benefits to both, or all, participants.
BlaBlaCar has more than 25 million users in 22 countries. At least 10 million trips are arranged per quarter, and of course each “trip” requires at least two members. In fact, the average car occupancy is 2.8 in a BlaBlaCar ride, compared to 1.6 to 1.8 (depending on the country) for car trips in general. BlaBlaCar estimates a reduction of CO2 emissions on the order of more than 1 million tons per year, but of course that estimate assumes that all riders would have taken their own trips solo, rather than take a train or simply not travel if the service were not available.
One of the interesting things about economics is that economists “in their studies” (to use the ambiguous phrase of A. C. Pigou, referring either to a published paper or the room in their own house where many economists do their “field” work) often miss the creative capacities of groups of people to build institutions that solve collective action problems. Elinor Ostrom was famous for discovering and telling the world about these kinds of institutions.
Another interesting thing is that these “market” institutions may not formally involve markets, in the sense that there is a payment and a good or service. Instead, cooperative private voluntary institutions can arise just around the existence of a shared interest. In this case, there is a shared interest in commodifying excess capacity, in the form of empty seats in cars and trucks. But there is an artificial sweetener, an important one, that makes cooperation much more valuable.
Like many artificial sweeteners, this one leaves a bad taste in many people’s mouths. It’s the legal right to use the HOV lane at rush hours. “HOV” means “high-occupancy vehicle,” of course, and is variously defined. The important thing is HOV lanes move faster, sometimes much faster, than the normal lanes of traffic. Access is partly the “honor system,” but you can get an expensive ticket if you use the HOV lane and get caught. Some people have tried to use mannequins, or inflatable dolls, as “passengers” to qualify for access to the faster HOV lanes. A hearse in Nevada did have a driver and a second person in the car, but the state trooper interpreted the law as requiring that second person to be alive to count.
Real legal access generally requires two, or in the case of the Washington, DC, area, three passengers, but motorcycles or alternative “green”-fuel vehicles can also qualify. Some people think that’s arbitrary, or unfair.
Other people, though, have found ways to reduce the transaction costs of cooperation. After all, hitchhiking would solve the problem. Instead of mannequins, a couple of real humans give a driver access to HOV and a much faster ride. And for the riders, the benefit is the ride itself. There are obvious gains to cooperation.
The problem, as is always the case, is transaction costs. The difficulties are the same as with hitchhiking, except that now you have to coordinate a driver and two riders. In the Washington, DC, area a convention has developed around a concept called “the slug line,” where slug is both a noun (the person seeking a ride) and a verb (“slugging” is offering yourself up as a ticket to use the HOV lane in exchange for getting a ride).
There have always been “ride billboards” at colleges, or military bases, for people who need to get home or somewhere. There may be an arrangement where the rider pays for some or all of the gas, but mostly the rider is looking for cheap transport. The HOV requirement adds a wrinkle, because having riders is actually valuable to the driver.
The “slug line” institution started up at least 45 years ago, in the mid-1970s, at least in DC. The creation of HOV lanes and the high price of gas meant that sharing a ride and (sometimes) kicking in a few dollars for gas benefitted all parties. There were a few designated (by convention: nothing was written) places where people who shared a destination would line up. Cars would pull up, call out their destination, and the next person in that destination line would get in. It was reliable enough that people used it to commute to work, which meant there was a high transaction density, where drivers could reliably find passengers and vice versa.
About 10 years ago a website was set up. According to the website, the process worked pretty much the same way:
A car needing additional passengers to meet the required 3-person high occupancy vehicle (HOV) minimum pulls up to one of the known slug lines. The driver usually positions the car so that the slugs are on the passenger side. The driver either displays a sign with the destination or simply lowers the passenger window, to call out the destination, such as “Pentagon,” “L’Enfant Plaza,” or “14th & New York.” The slugs first in line for that particular destination then hop into the car, normally confirming the destination, and off they go.
No money is exchanged because of the mutual benefit: the car driver needs riders just as much as the slugs need a ride. Each party needs the other in order to survive. Normally, there is no conversation unless initiated by the driver; usually the only words exchanged are “Thank you,” as the driver drops off the slugs at the destination.
The difference now is that the system is much more organized, with morning slug lines, and afternoon slug lines, and detailed instructions about etiquette and rules, because there are so many people waiting and everyone is in a hurry.
If you pay attention, you’ll notice a lot of things that “economists in their studies” may not be able to imagine. But they exist. Because people are really good at finding ways to cooperate.
Michael Munger
Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University.
Munger is the author of Is Capitalism Sustainable? (AIER, 2019)
