Taxi drivers in the United States pay up front to buy or rent a locket and keep the fares to themselves. With Uber or Lyft drivers, on the contrary, no medallion is required, but they have to pay part of the fares to the ridesharing companies. Sydnee Caldwell and colleagues conducted a series of experiments and found a strong aversion to the medallion rental model among drivers: 81% of them would rather pay a 25% fee rather than pay a weekly lease of $ 200 .
One difference between American taxi drivers and their rideshare counterparts is how they are paid. In most major US cities, taxi drivers must own or hire one of the limited number of taxi medallions to be eligible to drive. Most choose to rent a medallion by the team, by the day or by the week. After paying the rent, these drivers can drive as much or as little as they want, keeping any fares they charge. In contrast, drivers who drive for ridesharing companies, like Uber or Lyft, typically don’t pay anything up front. Instead, some of the fares they charge go to the rideshare company (proportional fee model).
In a recent article, Joshua Angrist, Jonathan Hall, and I compared the economic benefits and costs of taxi and ride-sharing compensation models. Specifically, we asked how much Uber drivers should be compensated for the loss of carpooling work opportunities (i.e. the loss of the proportional fee model) if the goal is to leave them as well as ‘before. Some drivers prefer the taxi model and therefore do not need compensation. However, these represent a small minority of carpooling drivers. For the average driver, the compensation required to make them whole is significant, as a fraction of weekly earnings.
The contrast between rental-based royalty models and proportional royalties also emerges in other contexts. For example, while some hairdressers and beauticians rent chairs by the day or by the week, others donate part of their income to the salon. Some franchise owners pay fixed royalties, while others pay royalties proportional to sales. Our analysis provides a framework that can be used to assess the relative advantages of these models.
Rental-based and proportional payments
Two parameters govern this carpooling: the compromise between taxis. The first, the elasticity of labor supply, tells us how hours react to changes in wages. All other things being equal, the hourly wage of a taxi driver is higher because he does not pay a proportional fee for each trip. If a driver works longer hours when wages are higher, he is more likely to see a benefit from the hire.
The second parameter governing this trade-off is what we call lease aversion. Lease aversion is analogous to what behavioral economists often call loss aversion. This measures the extent to which drivers are opposed to the implicit bet in the decision to buy a lease. The drivers who take the taxi contract bet that there are enough fare options to earn more than they would have in the default scenario, proportional fees. This bet may not pay off if the driver is unable to drive for personal reasons (for example, if he is ill) or if the driver’s demand is low.
The earnings accelerator
We conducted a series of experiments to estimate the value of the carpooling compensation model. In these experiments, we randomly assigned Uber fee reductions to a large sample of Boston Uber drivers. Uber has changed the way it pays its drivers since we conducted our experiments. However, at the time, most Boston drivers had to pay a flat fee of 25%. Our fee reductions have enabled these drivers to increase their income by about a third.
We also offered randomly selected drivers the option of renting a virtual locket: in exchange for an upfront payment, a processed driver would avoid Uber fees for a week. We randomly assigned the drivers to different upfront payments. At $ 15 to $ 165, our virtual lockets were significantly lower than actual locket leases.
Acceleration of earnings
We found that drivers reacted strongly to changes in their hourly pay. A ten percent increase in hourly earnings got them to drive about 12 percent more. This was true for drivers who typically drove a few hours per week (5-15 hours / week) and for drivers who drove more regularly (15-25 hours / week). Figure 1 shows the average behavior of drivers the week before our tariff increase, the weeks of treatment (a random half received the treatment in wave 1, the rest in wave 2), and the week after the treatment. This figure reveals that there was a large increase in hours while treatment was in effect, with little effect on hours worked in the week before or after treatment.
Figure 1 – Drivers increased the number of hours worked during the experiment
Our taxi experiments revealed that many drivers who would have benefited financially from our offers did not. For drivers who drove during the week of treatment, the expected average financial benefit, after taking into account the cost of the rental, among those who does not have accepting our taxi offer was $ 115 (see Table 6 in the newspaper).
Mere inattention (not seeing or ignoring our messages) does not explain the patterns of the data. If a fraction of drivers simply ignored our messages, we would see that our predicted and observed adherence rates differed by a fixed fraction across all treatment groups. Instead, we see that the spreads are larger in groups that have faced larger virtual leases. Membership decisions are what we expect when drivers behave as if the rental offered is forty percent more expensive than it actually is.
Our experimental results suggest that the drivers in our sample – active drivers in Boston in 2016 – should be paid an average of $ 445 to switch to a $ 400 / week rental program from a proportional rate of 25%. It’s more than the size of the lease! Even with lower rents, most drivers need compensation. For example, after factoring in drivers’ aversion to rental, 81% of drivers would rather pay a 25% fee rather than pay a weekly rental of $ 200.
The aversion to leasing has not escaped the Taxis and Limousine Commissions. A 2015 report by the New York Taxi and Limousine Commission noted that “other [the New York Taxi and Limousine Commission] identified include the perceived inflexibility of current leases offered by lessors as well as the stress associated with starting shifts “in the red” having paid a fixed rental price at the start of shifts. Maybe the proportional model will soon be available to all drivers, whether it’s taxi or carpooling.
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To note: The post office gives the point of view of its authors, not the position USAPP – American Politics and Policy, nor the London School of Economics.
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Sydnee Caldwell – University of California, Berkeley
Sydnee Caldwell is an Assistant Professor in the Haas School of Business and in the Department of Economics at the University of California at Berkeley. His research focuses on wage setting and competition in the labor market.