Pay-as-you-speed. Two Field Experiments on Controlling Adverse Selection and Moral Hazard in Traffic Insurance

Transcription

1 Pay-as-you-speed Two Feld Experments on Controllng Adverse Selecton and Moral Hazard n Traffc Insurance Gunnar Lndberg Lars Hultkrantz Jan-Erc Nlsson Frdtjof Thomas Abstract: Around one mllon people are klled world wde every year n road-traffc accdents. The rsks and consequences of accdents ncrease progressvely wth speed, whch ultmately s determned by the ndvdual drver. The behavour of the motorst thus affects both her own and other peoples safety. Internalsaton of external costs of road transport has htherto been focused on dstance-based taxes or nsurance premums. Whle these means, as they are desgned today, may affect drven dstance, they have no nfluence on drvng behavour. Ths paper argues that by lnkng on-board postonng systems to nsurance premums t s possble to reward careful drvng and get drvers to self select nto dfferent rsk categores dependng on ther complance to speed lmts. We report two economc feld experments that have tested ways to nduce car-owners to have techncal platforms nstalled n ther vehcle n order to affect the extent of speedng. It s demonstrated that a bonus to remunerate those that have the devce nstalled, tantamount to a lower nsurance premum, ncreases drvers propensty to accept the techncal devces. In a second experment the sze of the bonus s made dependent on the actual frequency of speedng. We fnd that ths s a second way to dscplne users to drve at legal speeds. Key-words: Traffc safety, mpure publc goods, moral hazard, adverse selecton, self selecton. 1 All authors work at the Swedsh Natonal Road and Transport research Insttute, and can be reached by e-mal Full.Name@vt.se. Hultkrantz s also at Örebro Unversty. 1

2 1. Introducton More than 20 mllon people are severely njured or klled on the world s roads each year, and the burden falls most heavly on developng countres, where t wll grow heaver stll because of the rapd ncrease n the number of vehcles (WHO 2004). A recent estmate of benefts from safety enhancng electronc equpment n motor vehcles s based on that accdent costs may add up to about 2 percent of GDP n many countres (OECD 2003). Accdents appear both because of chance and of llct behavour. Moreover, ther consequences fall both on those behavng mproperly and on the non culpable. In vew of the enormous costs, t s no wonder that nternalsaton of external cost of transport snce long s hgh on the transport polcy agenda. Surcharges on fuel are used to nternalse otherwse external costs, and much effort has been drected to calculate the (external) cost to socety generated by addtonal dstances drven; except for accdents ths ncludes congeston, envronmental costs and road wear and tear (cf. Nash & Mattews forthcomng). The ratonale for usng fuel as a bass for a Pgou tax for nternalsaton of accdent costs s that the more a vehcle s drven, the more fuel s used and the larger s the rsk that t ends up n an accdent. But parameters other than dstance may be equally or more mportant for understandng varatons n accdent rsks and n external accdent costs. In ths paper we are concerned wth speed as an mportant explanaton of accdent rsks; the hgher the speed, the hgher s the rsk for gettng nvolved n, and the more severe s the consequence of, an accdent. In addton, the hgher the speed of a partcular vehcle, the hgher s the accdent rsk for meetng or bypassed vehcles. The choce of speed, or the frequency of speedng, may also be collnear wth other behavoural drvng patterns related to accdent rsks, such as dangerous overtakng. Fuel charges are a much too blunt an nstrument for handlng ths dmenson of accdent externaltes. Traffc safety s a publc good n that one person s safe drvng wll beneft all vehcles n a traffc system. The ndvdual wll however choose speed by balancng hs or her own safety aganst the prvate costs of arrvng sooner or later to a destnaton, wthout necessarly takng the benefts to others of safe drvng nto account. As we wll show below, the drver takes part n a prsoners-dlemma form of socal nteracton wth other road users n ther choce of 2

3 speed. Traffc safety wll therefore be underprovded compared to a socally effcent outcome. To dscplne drvers nto handlng the externalty n speed choce, most countres rely on combnatons of regulatons (speed lmts), enforcements (speedng tckets) and vehcle nsurance schemes (bonus/malus constructons). Except for road-sde polcng, these nstruments have a common shortcomng n ther lmted possblty to base rewards or punshments on actual drvng behavour. In partcular, nsurance schemes manly reflect the cost of materal (vehcle) damages caused by accdents, but not the cost of fataltes and njures whch usually s the major component of the external cost. Moreover, nsurance premums are dfferentated between drvers only by broad characterstcs, such as age, that are only weakly related to actual drvng behavour. 2 However, new technologes, ncludng postonng systems (such as the Global Postonng System GPS), moble communcatons, and mprovements of the nformaton nfrastructure (dgtal maps etc.) often collectvely referred to as Intellgent Transport Systems (ITS) now make observaton of drvng performance feasble. Several of these are already on the market, for nstance to serve as navgaton ads. The dea behnd ths paper s that, successfully engneered, ITS gadgets can be used for more than ndvdual convenence. In partcular, ITS can be made nto an mportant tool for reducng accdent rsks. Usng economc ncentves n the form of dlgently desgned nsurance schemes, t s furthermore feasble to create a market-led ntroducton of these technologes for safety purposes based on the standard Pareto prncple that the free choce of ndvduals to purchase an tem mproves ther welfare. The purpose of the paper s to report about two economc feld experments, based on the drver beng remunerated for havng and usng the new equpment, n ths way nternalsng 2 Parry (2004) compare alternatve polces to reduce traffc accdents n the U.S. context, based on estmates of margnal external accdent costs for dfferent drver/vehcle categores. Among four compared polces he fnds the most effcent beng a dfferentated mleage tax where each drver/vehcle category s charged a tax equal to ts per-mle external cost. An nsurance reform, changng premums that are currently perceved on a lump-sum annual bass to a per-mle bass, s found to be nferor to ths. Insurance premums were assumed to vary n proporton to vehcle prce and between three drver-age categores (below 25, 25-70, and above 70). The resultng premums were found to be only loosely connected to external costs. 3

4 accdent externaltes relatve to speed. Usng the classfcaton of Harrson & Lst (2004), we characterse our experment as a framed feld experment. The frst experment has tested a polcy where drvers have volunteered to nstall the equpment n return for a lump-sum (bonus) payment. Wth the equpment, nformaton about gong speed lmts and about speedng s contnuously provded to the drver, and ths nformaton may nduce hm or her to drve more carefully. The experment shows that the offer of a bonus has a sgnfcant mpact on the propensty to have the equpment nstalled. We argue that makng ths offer s a means to overcome an adverse selecton problem; careful drvers opt for the equpment and get an nsurance bonus whle more frequent speeders don t, and consequently have to pay more for ther polcy. The second experment extends the use of the equpment, by usng recorded data about actual drvng and speedng as a bass for calculatng the sze of a bonus receved for partcpatng n the experment: Volunteers get a (monthly) lump sum for partcpaton, but the payment s reduced f the vehcle has been drven too fast. We show that lnkng payment to speedng has a sgnfcant effect on drvng behavour and argue that ths s a means to deal wth moral hazard aspects of drvng. A real-world mplementaton would lnk the sze of an nsurance premum to the extent of speedng. After a bref revew of some related lterature n the next secton, we start the presentaton n secton 3 by dscussng the publc good propertes of speed choce. Secton 4 descrbes the adverse selecton, and secton 5 the moral hazard experment. Secton 6 concludes. 2. Prevous lterature Intellgent Speed Adaptaton (ISA) s the generc name for systems n whch the drver of a vehcle gets feedback on whether speed lmts are exceeded; ths s but one example of an Intellgent Transport System applance. Carsten and Tate (2005) categorse ISA systems as Advsory, Voluntary ( Drver Select ) and Mandatory Systems, dependng on how ntervenng t s. 4

5 Research projects and trals wth ISA have been conducted n some European countres. The largest of these has been made n Sweden wth several thousand ISA-equpped vehcles on the road, most wth advsory systems that nform the drver about the gong speed lmt and provdes a warnng n case of speedng (Vägverket 2001). Based on UK trals, Carsten and Tate (2005) predct that a mandatory ISA system, preventng motorsts from drvng faster than speed lmts and ntroduced n all road vehcles, would save 20 percent of njury accdents and 37 percent of fatal accdents n the Unted Kngdom. They also estmate a socal beneft-cost rato of such a program at between 8 and 15, dependng on varous crcumstances. A mandatory system would be dffcult to mplement for numerous reasons. It requres poltcal support at the natonal level and co-ordnaton at the nternatonal. Also, even f partcpaton s mandatory, the wllngness of ndvdual drvers to comply s lkely to be an mportant ssue as there may be several more or less nnovatve ways of dsconnectng or shuttng down on-board ISA devces. In contrast, the present study focuses a voluntary ISA system, to whch ncentves for enrolment would be provded by a traffc nsurance scheme that encourages nstalment of such a system and/or complance to the recommendatons gven by t. Our study s therefore related to the vast theoretcal and emprcal lterature on optmal nsurance schemes n an asymmetrc nformaton settng; see Donne et al. (2000) for a generc model of adverse selecton n nsurance markets and Wnter (2000) for a summary of the generc moral hazard model. There are a few studes wthn ths lterature that use expermental methods to study how the desgn of nsurance schemes affects enrolment (adverse selecton) and behavour (hdden acton). For nstance, usng a (hypothetcal) choce questonnare Royalty and Hagens (2005) nvestgate the effect of the out-of-pocket premum on the decson of employees n the U.S. to enrol n employer health nsurance and other benefts plans. There s also a large lterature wthn labour and publc economcs on the effects of socal and prvate welfare programs on hdden acton, such as the ntensty of job search. Several studes take advantage of natural quas-experment desgn features of such programs. There are also 5

6 some feld experments based on classcal expermental desgn. For nstance, n the Maryland experment (Klepnger et al. 2002) clamants to an unemployment nsurance program were randomly assgned to one of four treatment groups, each representng a dfferent work-search polcy, or two control groups. Our paper makes use of feld experments as a wnd tunnel for testng new deas: Based on a crude theoretcal bass, two smple mechansms are tested n a real applcaton. The results are nterpreted as supportve of the possblty to use more targeted nsurance schemes to deal wth an mportant socal dlemma,.e. to nduce people to take the full consequences of ther behavour nto account. We are therefore now tryng the more dffcult task to approach governments and nsurance companes wth ths new opton. 3. Under-provson of safety and the equpment as an mpure publc good Consder the utlty functon of speed ( s ), and the assocated utlty ( t( s) ) U of drver. The travel tme ( t ) for any gven trp s a functon U s c.p. ncreasng n speed,.e. U t > 0 for all. On the other hand, speed has an adverse effect on traffc safety ( a ) for t s the drver due to an ncreased accdent rsk 3, as well as potentally more severe accdent consequences, of hgher speed. Ths s formalzed as U ( a ( s) ) U a for all., wth < 0 a s Note that the detals of a () s may or may not vary wth, meanng that for any gven speed a may or may not dffer from ( s' ) s ', ( s' ) a j for j ; we only requre that c.p. changes of drver s speed affect drver s utlty n the way stated above. It may or may not therefore be objectvely true that some drvers can drve faster than others and stll have an accdent rsk that s lower than the typcal drver s accdent rsk (.e. are exceptonally good drvers ). The travel tme saved by hgher speed s a prvate good and the thereby ncreased accdent rsk s a prvate bad, consequently leavng the sgn of the dervate of U ( t( s) a ( s) ), wth 3 Based on a revew of several studes, Fnch et al. (1994) estmate that accdent rsk s reduced by 3 percent for each 1 km/h reducton n average speed. 6

7 U > respect to speed undetermned,.e. 0. Ths also means that the equlbrum speed s < (s*) the speed that a drver chooses may dffer across drvers; possbly * * s ( t, a, U ) s ( t, a, U ). j j j But accdent rsks and/or accdent consequences are also a functon of the speed of all the other vehcles ( S ) n the traffc envronment; U ( t( s ) a ( s, S ) ) U a,. We have < 0, a S meanng that for all drvers, a c.p. speed ncrease by any other drver decreases ther utlty. Suppose that an ndvdual drver can purchase a techncal devce d that asssts n choosng a better nformed travel speed for a cost of p d and let y represent the monetary value of drver s accumulated remanng consumpton. Indvdual wll purchase the devce voluntarly only f U * * ** ** ( t( s ), a ( s, S ), y p d = 1) > U ( t( s ), a ( s, S ), y d = 0) d, where d = 1 ( d = 0 ) ndcates that the devce s (s not) purchased. s* and s** and may dffer,.e. the equlbrum speed may be dfferent f the equpment s or s not nstalled. Note that the subjectve experence of nfrngement due to survellance of the drvng behavour s captured by the condtonng statement n the utlty expresson above, and can be seen as beng an nherent part of any drver s utlty functon. The devce s only purchased by those who consder the ncreased utlty derved from t to be hgher than the decreased utlty due to non-consumpton of other commodtes of equal monetary value,.e. p. These drvers can generally be characterzed by havng stronger d preferences for traffc safety and/or lower utlty assocated to addtonal consumpton of other commodtes. The latter mght be true for e.g. hgh-ncome ndvduals, but snce ths group can be expected to have a hgh value for travel tme savngs t ( s) as well, t s by no means clear that the demand for the equpment wll ncrease wth ncome. 7

8 The aspect we focus on here s that ndvduals wll not take the consequences of ther choce of speed on others utlty nto account. Thus there s an obvous rsk for under-provson of ths mpure publc good. 4. Feld Experment I: Lurng Young Drvers nto usng In-Vehcle Electronc Equpment Over the perod, the owners of about 250 prvate cars and 150 commercal vehcles n Borlänge, a town n md-sweden, were part of a feld test where they had ther vehcles equpped wth a small computer ncludng a dgtal map, a GPS and a moble communcaton faclty. The dgtal map comprsed all roads n the area, both the muncpalty s and the state roads. All exstng speed-sgns were metculously regstered and changes n speed regulatons were updated wth regular tme ntervals. An n-vehcle dsplay contnuously nformed the drver about the gong speed lmt, and an acoustc sgnal sounded f the vehcle was drven above the speed lmt. The equpment was therefore bascally a means for provdng drvers wth detaled nformaton about whether or not they drove too fast. As part of the project, drvng behavour.e. the speed relatve to the gong speed lmt was beng recorded every tenth second, and even more frequently f the vehcle was speedng. An ex post assessment of the Borlänge test and of smlar tests n three other Swedsh ctes, undertaken by the fundng agency, the Swedsh Natonal Road Admnstraton, ndcated that the equpment had resulted n a 7 percent reducton of average speed n the fleet of vehcles (Vägverket 2002). It s reason to queston ths number, prmarly snce there s poor data to contrast the tral perod aganst. For the purpose of ths paper, we wll, however take as a datum that mproved nformaton about the vehcle s speed relatve to gong speed lmts, has a postve mpact on drvng behavour. In ths secton, we descrbe a feld experment that sought to attract addtonal vehcle owners to the test crew. The means for dong so was to offer a sample of the target populaton an economc ncentve for havng the equpment nstalled. Secton 4.1 motvates the nterest n young drvers as the partcular new test crew and presents the frame used for dentfyng the target populaton. Secton 4.2 detals the offer made, secton 4.3 reports the result of our questonnare and secton 4.4 concludes. 8

9 4.1 Attractng New Users In 2002, several vehcles n the orgnal test fleet had been sold or equpment had for other reasons been removed. The test fleet was consdered too small, and snce about 130 electronc platforms were avalable, a process to recrut new test drvers was ntated. In ths, a pont of departure was that the exstng test crew, all of whch had volunteered to partcpate back n 1998, dd not represent an average of vehcle owners. In partcular, younger drvers were under represented, wth no car-owner under the age of 30 n the group. Young drvers are of nterest also for another reason. It appears to be a generally accepted proposton that young drvers are over represented n accdent data n comparson to the sze of the group. 4 Ths may be explaned by sheer nexperence, but there s also reason to beleve that youngsters drve faster than the speed lmt more often than the populaton at large. For these and for other reasons, t s of nterest to examne the possblty to affect the behavour of ths partcular group of drvers. It was therefore decded that the target populaton for the present study was young drvers ownng a car and lvng n the muncpalty of Borlänge. Our frame to obtan observatonal access was obtaned from the Swedsh Central Vehcle Regstry that records all cars and ther owners n the country. The addresses are updated regularly by retrevng nformaton from the Swedsh Regster of the Total Populaton. Changes n car ownershp are regstered wth a few days delay only. In August 2003, a lst was compled from the Vehcle Regstry contanng the names and addresses of all ndvduals of age 18 to 28 (nclusvely 5 ) that had ther man address n the muncpalty of Borlänge and was reported to own at least one car that was n actve use n traffc. Ths frame s not perfect. Frst, some young drvers lvng n Borlänge and ownng a car are not n the frame populaton. Most notably, temporarly vstng guest students from foregn countres, as well as Swedsh students spendng most of ther tme n Borlänge but stll beng regstered under an address outsde the muncpalty of Borlänge, are not contacted 4 We have faled to fnd formal emprcal proof of ths proposton. 5 The exact crteron was that the ndvduals must turn/have turned 18 at the latest durng the year 2003 and must not turn/have turned 29 durng that same year or any prevous year. 9

10 n ths way. We acknowledge ths fact but are not very concerned about ths under-coverage of the frame. Second, and of greater concern to us, s a possble over-coverage of the frame. Young drvers that have moved to one of the country s larger ctes may have an economc ncentve to hold on to ther Borlänge address. Ths s so snce Borlänge may qualfy them for lower nsurance premums than n many other ctes, most notably for vehcle damage nsurances. Young ndvduals that grew up, and stll have ther parents lvng n the muncpalty, but are e.g. studyng n another cty, may use ths possblty. We expect these ndvduals to have ther mal forwarded to ther address of permanent resdence. Many of them may vew themselves as not belongng to our group of nterest anymore and consequently gnore our nvtaton n a sort of self-deselecton. Most typcally ths wll not come to our attenton, but wll manfest tself as a non-response. Despte the fact that we can only observe non-response n general, t s mportant to dstngush between non-response due to the absence of nterest n the speed-trackng devce as such, and non-response due to self-deselecton of an ndvdual caused by dscrepancy of offcal from real permanent resdence. Ths s especally true when estmatng the proporton of ndvduals prepared to consder an nstallaton of the devce. As we wll see, ambguty n the nterpretaton of the non-response can be an mportant factor when nterpretng the result of our experment. 4.2 Proposal letter and selecton of sub-groups The frame populaton contaned 1,271 ndvduals and a letter of nvtaton was sent out to each of the assocated addresses. Snce the experment sought to recrut only 130 ndvduals, and n order to avod too many yes answers, only half the populaton were actually offered the equpment for nstallaton. The other half of the target populaton receved an offer that was dentcal n all respects except that the proposed queston was only hypothetcal. We wll focus here on the group that receved the real offer. The respondents recevng the factual offer were randomly selected from the ndvduals n the frame and allocated nto two sub-groups before the contact letter was maled. One of the 10

11 groups was asked to partcpate aganst recevng a monthly remuneraton of SEK 150 (USD 20) for the full year that the experment would last. They would therefore earn SEK 1800, net of taxes (whch the project would pay), wth the only provson that the equpment was functonal durng the whole perod. Payments were to be made monthly after checkng for that drvng behavour had been logged and successfully transferred nto the data base. The other group was nvted to partcpate wthout any remuneraton beng pad. Table 1: Number of nvtaton letters. In parentheses the number sent out ncludng those returned to sender due to unrecognzed addressee. Offerng devce Wth remuneraton 212 (213) Wthout remuneraton 421 (423) Sum 633 (636) The project was descrbed on a sngle page. Except for one of the four questons descrbed above, the letter also contaned a four-page questonnare regardng atttudes towards safety aspects of travellng. Ths questonnare s not of mmedate nterest to us, but would allow for refned ex post analyses of drver behavour durng the test perod n later stages of the experment. 4.3 The response The 633 letters produced 264 answers,.e. a response rate of 41.7 percent, see Table 2. Table 2: Results from the questonnare. Wth remuneraton Wthout remuneraton Sum Obtaned yes 25 (11.8 percent) 19 (4.5 percent) 44 (6.9 percent) Obtaned no 64 (30.2 percent) 156 (37.1 percent) 220 (34.8 percent) No response 123 (58.0 percent) 246 (58.4 percent) 369 (58.3 percent) Sum 212 (100 percent) 421 (100 percent) 633 (100 percent) 11

12 Table 2 shows that 11.5 percent n the group wth remuneraton 6 returned a yes-answer as opposed to only 4.5 percent n the group not offered remuneraton. Vewng these proportons as two ndependent realsatons n the two groups, one can apply a smple sgnfcance test for comparng two proportons (see e.g. Moore and McCabe 2003, p. 592). Testng the hypothess of equalty of proportons, aganst the alternatve that the proporton of postve answers wth remuneraton s larger than wthout remuneraton, gves a P-value as small as Ths strongly ndcates that t s not reasonable to assume that the observed dfference s explaned by chance alone. 7 The remuneraton can therefore be assumed to have had a substantal effect on the postve response of the young drvers, albet many could stll not be attracted by that partcular remuneraton. The smple sgnfcance test for comparng two proportons overlook a lot of structure n the problem, and our data contans much more nformaton about the wllngness of young drvers to have the devce nstalled. Frst, non-response s generated by two crcumstances, ether by the falure to get n contact wth a selected ndvdual, or by a contacted ndvdual's nformed decson not to respond to the request. Second, t seems reasonable to assume that an ndvdual that s wllng to partcpate wthout monetary compensaton also would be wllng to partcpate wth monetary compensaton. Therefore, the obtaned yes-answers from the group wthout remuneraton do contan nformaton that s relevant for the nterpretaton of the answers obtaned from the group wth remuneraton. Lkewse, s seems reasonable to assume that an ndvdual whch returns a negatve answer when offered the monetary compensaton would not have returned a postve answer when not offered the monetary compensaton. Ths nherent structure can be drectly modelled usng contemporary statstcal methodology. A separate paper by Thomas (2005) provdes ths analyss and shows the followng (accountng for the structure n the problem as well as the ambguty n the nterpretaton of non-response): between 6 and 12 percent of the populaton would be attracted to nstall the techncal devce n the absence of the remuneraton whereas ths proporton s between 10 and 17 percent when the remuneraton n fact s offered. The sze of the group that can be nduced 6 As t turned out, we were grossly mstaken n our estmate of the propensty to partcpate snce the 25 aye s was way off the target 130 partcpants. Ths dd, however, not become a problem snce the equpment started to malfuncton at nstallaton, forcng us to close down the whole project. The volunteered were pad off wth a nomnal amount of money and an excuse referrng to frst-generaton technques. 7 The valdty of ths statement depends only on the exercsed control over the experment and does not depend on assumptons regardng to what extend the partcpatng group of young drvers s representatve for all young drvers. 12

13 to accept the devce s about fve percent of the populaton of young drvers. Ths group would not accept the devce wthout remuneraton but does so wth the remuneraton and s therefore of central nterest for polcy makng as ts behavour can n fact be changed by the remuneraton. 4.4 Dscusson The reported feld experment demonstrates that economc ncentves matter: An offer of a monthly remuneraton of SEK 150 for havng an nformaton-producng devce nstalled n ther vehcles, affects the number of young drvers that accept the offer. An nformed judgement s that the proporton of young drvers n a muncpalty lke Borlänge that can be nduced to nstall the devce n the absence of remuneraton s close to 9 percent. Snce around 14 percent seem to be wllng to take measures to qualfy f the potental reward s n party wth our compensaton, we expect that the effect of the scheme s to ncrease the partcpaton wth around 5 percent of the relevant populaton. For several reasons, subsdy schemes may be dffcult to use n real-world applcatons. The experence from the present feld experence can however readly be transferred nto current practces n the nsurance ndustry. Let us frst note that vehcle nsurance polces typcally are dfferentated across customer groups. In partcular, people wth new drvng lcenses, and those that have recently been nvolved n accdents, typcally pay a hgher premum than experenced drvers wth no accdent record. Ths s a way for companes to handle adverse selecton by proxy. Rather that calculatng charges that mmedately lnk to observed behavour whch at present s dffcult or at least costly the premum dfferentaton seeks to pnpont nsurance holders that are on average beleved to be a hgher rsk. The novel ITS technology however provdes a means for dentfyng more or less careful drvers. A small group of vehcle users are technque nerds or are very keen on safety aspects of ther drvng and would anyway buy the equpment. An economc reward can lure an addtonal number of vehcle owners nto havng the devce nstalled. Evdence from the Swedsh experments moreover ndcates that the equpment per se may nduce the owner to drve more carefully. If the communty of equpment users drve more carefully than the average drvers do, they wll by defnton be better customers for the nsurance company. The 13

14 devce can therefore serve as a proxy for careful drvers, and these can be remunerated by a lower nsurance premum. It s reason to beleve that women and the elderly wll be over represented n ths group. The others,.e. vehcle owners that don t have the devce nstalled, wll by defnton nclude a hgher share of hgh-rsk drvers, whch wll press the premums upwards n ths sub-group. The combnaton of whp (a hgher premum for some) and carrot (a lower for others), and the possblty to self select nto the low-premum scheme, may work to separate the market. Insurance companes may be reluctant to start usng these sophstcated premum schemes. Reasons nclude substantal admnstraton costs and that nsurance cost dfferences across sub-categores of drvers may be too small to nduce entry nto the subsdy scheme. It should be noted that the ncentve used n the above experment after all was farly hgh and stll attracted a farly small share of the populaton. The analyss n secton 2 however ponted to the prsoners dlemma aspects of the choce of speed,.e. that drvers don t account of the rsk to others of speedng. Ths mples a motve for government nterventon. One way of dong s to lnk the use of ITS equpment and a dfferentated nsurance polcy, to a complementary dfferentaton of the annual vehcle tax. Vehcle owners that (presumably) are more careful drvers than others would not only have to pay a lower nsurance premum, but also have ther vehcle tax reduced. For a balanced budget, the tax for other vehcles would have to be rased. Insurance companes can n ths way be made agents for the government, and the ndustry could possbly also be allowed to use the annual vehcle nspecton to ascertan that the equpment that has been nstalled also s functonng. 5. Feld Experment II: Intellgent Economc Speed Adaptaton 8 One shortcomng of the above experment, and of the real-world applcaton that has been drafted, s that the mere presence of the equpment n cars does not guarantee that drvers actually drve more cautously. A second feld experment has therefore studed the behavoural consequences of drectly lnkng the sze of a payment to expermental subjects to 8 Ths secton s based on Hultkrantz & Lndberg (2004). 14

15 ther actual behavour,.e. to the extent of speedng. 9 We wll argue that ths s an alternatve, or possbly complementary, way to use economc ncentves. Ths tme, t s not a certan type of vehcle owner, but the actual behavour that s remunerated.e. the moral hazard dmenson of the nsurer-ensured relatonshp s n focus. The expermental desgn of our second feld experment s presented n secton 5.1., results for two sub-groups of the populaton n sectons 5.2 and 5.3 and secton 5.4 sums up. 5.1 Expermental desgn In May 2002, 114 car owners that remaned from the orgnal feld test were nvted to partcpate n a complementary economc experment durng September and October that year. 10 The experment budget would pay a monthly lump-sum bonus for partcpaton. The bonus would, however, be reduced for each mnute a vehcle drove faster than the speed lmt. The purpose of the feld experment was to assess the consequences of ths speedng penalty for actual drvng behavour. A majorty of the remanng test crew (95 persons out of 114) accepted to partcpate, whle 9 rejected and 10 drvers dd not respond. An ex post comparson of partcpants and nonpartcpants shows that there s a self-selecton bas n the recrutment to our experment, n addton to the orgnal bas n recrutng partcpants. Our test crew s on average older than the non-partcpants and have less severe speed volatons. An mportant pre-condton for the result analyss s the seasonal varaton n drvng behavour due to clmate varatons. Under wnter condtons, whch usually begn n late October or n November and last untl March or Aprl, drvers typcally reduce ther speed. Our experment, however, benefted from the observatons of drvng behavour that had been collected durng prevous years. The mpact of speed volaton charges s therefore evaluated by comparng behavour of each drver when economc ncentves are n force wth the same drver s behavour durng the same month one year earler. 9 It should be noted that ths experment was performed one year before the experment presented above, but s presented here for the sake of clarty n exposton. 10 The group of drvers fltered out n ths process are n no way a representatve sample of car owners. The test group s lkely to be hghly motvated because of an nterest n the technology, a preference for safe drvng, desre to assst research, or whatever. The queston for our experment, hence, s how the drvng behavour of such hghly motvated ndvduals changes when economc ncentves are added. 15

16 Economc parameter values were systematcally vared n order to assess ther relatve mportance. Frst, partcpants were randomly assgned to a low or hgh bonus group (250 or 500 SEK/month). 11 Second, snce the accdent rsk ncreases progressvely wth the speed of the car, the bonus reducton was made progressve. The cost for drvng up to 10 percent above the speed lmt for the low-bonus groups was 0.10 SEK/mnute (TYPE I speedng), 0.25 SEK/mnute for drvng percent above speed lmts (TYPE II) and 1.00 SEK/mnute for speed offences hgher than 20 percent (TYPE III). Thrd, a double speedng penalty,.e. 0.20, 0.50 and 2.00 SEK/mnute n the respectve groups, was also enacted. Fourth, a control group was created that were pad the respectve bonus but faced no deductons for speedng. Table 3 summarses the sx treatments. Table 3: Treatment groups -v (no. of ndvduals n the group). Deducton when speedng Base bonus 0 Low Hgh 250 SEK (15) (16) v (16) 500 SEK (16) v (16) v (16) In addton to ths premedtated settng of treatments, the refusal of 14 ndvduals to partcpate provdes us wth an extra reference group. Snce the non-partcpants stll were part of the overall test and therefore had ther drvng behavour montored, t was ex post feasble to contrast the behavour of those that have and have not joned forces wth the economc experment. Fgure 1 and Table 4 descrbes the nature of the nformaton used for assessng the consequences of the economc ncentves. Fgure 1 presents the speed of car number 58, a drver wth low bonus/low deducton, usng roads wth speed lmt 50 km/h n September 2001 and September A correspondng summary was made for all classes of speed lmts. Frequency here refers to the share of total tme drven at ths speed. Eyeballng the fgure, t s obvous that the ncentve scheme has shfted the drvng behavour to the left,.e. the proporton of tme drven above the speed lmt has been reduced. At the end of each 11 After havng randomsed partcpants t was checked that the observed drvng behavour n September 2001 dd not dffer systematcally across treatment groups. 16

17 month, partcpants receved nformaton about ther speed behavour, the sum of charges and remanng bonus n the way llustrated by Table 4. Fgure 1 Speed profle of car #58 on roads wth speed lmt 50 km/h September 2001 (no charges) and September 2002 (wth charges). requ 0.2 nce Type I Type II Type III Sept Sept Km/h 17

18 Table 4: Informaton provded to the owner of car # 58, September 2002 about no. of mnutes speedng n each class of speed volatons and consequent speed charges. Speed volatons Speed lmt Prce/mnute Total deducton km/h km/h km/h km/h km/h 0percent to 10percent ,20 kr,60 kr above speed lmt 11percent to 20percent ,00 kr,00 kr above speed lmt Above 21percent above ,00 kr,00 kr speed lmt Total 0 mn 3 mn 0 mn 0 mn 0 mn,60 kr Fxed monthly payment for the perod: 250 SEK Deducton (rounded): 1 SEK Payment (net before tax): 249 SEK Ths payment wll be transferred to your bank account. In addton, VTI has pad prelmnary ncome tax drectly to the Tax authorty on your account wth: 107 SEK A relatve measure of speed volaton (PVM Proporton Volaton Mnutes) s calculated for each ndvdual (j) as the tme the drver volates the speed lmt for each type (severty class) of volaton () (VIOL), relatve to the total travel tme durng the month (M). VIOL j PVM j = (1) M j = Type I, Type II or Type III j= ndvdual PVM wll dffer across ndvduals due to non-observable ndvdual characterstcs, but the focus here s on the dfference n behavour over tme on an ndvdual level. The absolute adaptaton s the dfference n Proportonal Volaton Mnutes pror to, and as a result of the experment for each volaton type (equaton 2). Δ PVM = PVM PVM (2) j 2002 j 2001 j 18

19 5.2 Results: Adaptaton of partcpants compared to non-partcpants A frst step n the analyss of how economc ncentves affect behavour s to compare the 95 ndvduals that opted to partcpate wth the 14 persons that dd not. The dataset s restrcted to ndvduals where we have observatons from both 2001 and Fgure 2 shows that non-partcpants drve too fast about 17 percent of the tme n 2001 and tend to have the same drvng pattern n Partcpants drve too fast about 14 percent of the tme n 2001, but the extent of speedng drops to about 8 percent n Obvously, the partcpaton n the experment has reduced the proporton of speed volatons. Table 5 demonstrates that the dfference n absolute adaptaton between partcpants and non-partcpants s sgnfcant for all volaton types except for the severest volatons n October. Fgure 2: PVM, all volatons for partcpants (damonds) and non-partcpants (quadrates) Yes No YesNov Sept 2001 Oct 2001 Nov 2001 Sept 2002 Oct 2002 Nov

20 Table 5: Absolute speed adaptaton between 2002 and GROUP Partcpants Non-partcpants Dfference Mean Std dev Obs Mean Stddev Obs Mean Std dev t-value September September Δ PVM All ** Δ PVM I ** Δ PVM II ** Δ PVM III ** October - October Δ PVM All ** Δ PVM I ** Δ PVM II ** Δ PVM III *) Sgnfcant on 90percent level, **) Sgnfcant on 95percent level. 5.3 Results: Adaptaton wthn the group of partcpants Fgure 3 provdes an overvew over the observatons for October, both for the 14 nonpartcpators and for the 95 volunteers. Four treatment groups (64 drvers) had a speed related penalty (se table 3 above) whle two groups (31 drvers) had no penalty but dd receve a lump-sum for partcpatng (zero-prce). As ndcated by Table 6 (below) we have fewer observatons than so, due to malfunctonng equpment. The number of observatons n some groups provdes one reason for the problem to obtan sgnfcant dfferences between groups. Both the groups wth and wthout penaltes reduced the proporton of speed volatons durng the experment months compared to the same months prevous year. The four treatment groups wth speedng penaltes volated the speed lmt 15 percent of ther drvng tme pror to the experment and 7 to 9 percent durng the experment. The zero-prced group had a volaton of 11 to 12 percent pror to, and 7 to 8 percent durng the experment. 20

21 Fgure 3: Relatve adaptaton October 2002 compared wth October No= nonpartcpants. Zero groups +; prced groups -v; low B groups +v; hgh B groups v+v; Low P groups +v; Hgh P groups v+v. Adaptaton October 2002/ % 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% No Yes Zero Prced Low P Hgh P Low B Hgh B PVM PVM I PVM II PVM III The formal test of sgnfcant dfferences n Table 6, ndcates that there s a (weak) dfference n adaptaton durng October but not n September. Ths can probably be explaned by a learnng effect. Durng the frst month of the experment, several no-penalty drvers contacted the project secretarat and asked f the zero prce really was correct. Ths group may therefore have changed behavour as a result of recevng a lump-sum bonus, but after the feed-back month they realsed that the non-penalty was accurate and behaved accordngly,.e. dd not let the economc experment affect ther behavour. The table also ndcates that t s only the dfference n adaptaton for the more severe volatons (PVM 2 and PVM 3) that are sgnfcant. As expected, we fnd the strongest reacton n the more severe volatons wth the hghest prce per mnute. But a reducton n severe volatons means that the whole drvng pattern s pushed downwards. Type I volatons may therefore reman un-changed relatve to the comparson perod, smply because type II and type III speedng has been transferred and become (the less serous) type I volatons. 21

22 Table 6: Speed Adaptaton between 2002 and Comparson of partcpants wth and wthout penalty. GROUP Penalty No penalty Dfference Mean September September Std dev Obs Mean Stddev Obs Mean Std dev t-value Δ PVM All Δ PVM I Δ PVM II Δ PVM III October - October Δ PVM All * Δ PVM I Δ PVM II ** Δ PVM III * *) Sgnfcant at 90percent level, **) Sgnfcant at 95percent level. 5.4 Summary Penaltes that reduce the sze of a bonus payment when vehcles are speedng have a sgnfcant effect on drvng behavour. We have shown ths by comparng ndvduals that have partcpated n the experment wth those that opted out. Partcpants have sgnfcantly reduced ther frequency of speedng when rskng lower bonus payments. A smlar, whle not equally sgnfcant dfference can be seen when we compare dfferent ways to treat partcpants. Across bonus levels (hgh and low), and across dfferent levels of penalty deductons, drvers that receve no penalty change ther behavour less than those that face speedng penaltes. Moreover, penaltes bte n partcular for drvers that receve a low bonus for partcpatng, presumably snce the penalty then s a larger share of the base-lne bonus payment. We have demonstrated that the 14 non-partcpants,.e. those that dd not want to partcpate n the economc experment, had a manfest behavour dfferent than the 95 partcpants; they drve faster. Ths provdes an ndcaton of the mportance of self-selecton bas,.e. that t s 22

23 no chance that drvers dffer n ther propensty to accept offers of partcpaton bonuses that on the face of t should be consdered as benefcal; legal drvng s remunerated wth 250 or 500 SEK per month. It should also be reterated that our test crew s a far way from an average drver. Frst, a (random) sample of Borlänge ctzen were nvted to have the ITS equpment nstalled back n Secondly, those that joned n are presumably more nterested n ssues related to accdent rsks or whatever than the average. It s also reasonable to expect that the volunteers are more careful drvers than overall, snce they would otherwse have had to lsten to the annoyng alarm pretty often. And thrd, the volunteers to our complementary moral hazard experment represent a group of more careful drvers than the average. Our results ndcate that we stll are able to dscern a sgnfcant effect of economc ncentve on an already careful drvng pattern. 6. Dscusson The techncal development n the telecom-, computer and vehcle ndustres has progressed at mpressng speed over the last decade. But to the surprse of many, the ITS technology has not been mplemented n the transport sector to the extent expected. Whle electronc n-vehcle maps have been avalable for many years, the demand for such servces s stll low. The cost of the equpment, and the bonus servces t provdes, seems to be hgh relatve to the prce of a tradtonal map stored n the glove compartment. The present paper has reported about two feld experments ndcatng that electronc nvehcle equpment may have a potental use as a means for controllng one of the man determnants of motor vehcle accdents,.e. the frequency of speedng. The possblty to track and regster behavour n a way whch has not prevously been feasble, together wth elaborate economc ncentve schemes, may open up for new ways to ncrease traffc safety. Snce the type of ITS-based equpment that we have n mnd s an (mpure) publc good that may otherwse be under-suppled, government nterventon s requred. Lke many new technques, our suggestons for usng the equpment to handle adverse selecton and/or moral hazard types of problems, s fraught wth problems. One s that t s 23

24 merely a frst shot at an nsttutonal settng. A second s that the nterest from the nsurance ndustry most probably s restrcted by the propensty of ndvduals to respond to ncentves. If only few drvers use the new equpment and beneft from lower nsurance premums, the admnstratve costs may be too hgh to warrant the addtonal complcaton that the scheme would mply. It s obvous that close cooperaton between nsurance companes and government representatves n order to capture the publc-good qualtes of the problems, s a prerequste for further success. Also car-makers and the telecom ndustry have an obvous stake n the matter. A thrd ssue, and presumably the most contentous, s the bg-brother aspect of the technque. The sort of equpment we have n mnd wll make t feasble to montor the behavour of ndvdual vehcles, thereby obvously ntrudng on prvacy. A frst answer to ths problem s that most parts of the technque are already n use n many taxs and heavy vehcles and that other, more sophstcated versons of t are currently beng tested. 12 A second repost s the self-selecton trck that s suggested: All nsurance holders are nvted to partcpate. But t s only those that volunteer that run the rsk of beng recorded. 13 And volunteers are by ther nature less concerned wth the bg-brother aspects of the problem. We have also antcpated that volunteers are more careful drvers than average; snce they don t really have to change ther behavour so much, t s easy for them to acqure the equpment and save on the nsurance premum. In one way, ths group s of secondary nterest wth respect to safety snce they already are (relatvely) law abdng and therefore less accdent-prone. But the self-selecton nto the scheme wll push up nsurance charges for nonpartcpants, meanng a better ft of accdent rsks and -costs to actual (dangerous) behavour. The ITS technque most probably also holds promse for other applcatons n the road sector. One obvous example s the growng nterest n congeston prcng. The London verson of levyng fees s stll a crude manual scheme. The potental for elaborate and detaled traffc control by way of n-vehcle devces of the sort tested here, provdng extensve socal 12 Indeed, some nsurance companes have started to explore the possblty to have an usage-based nsurance ratng system. Progressve, n USA, has tred wth a system called Autograph, whch bases the nsurance rates on how much, when and where the vehcle s drven ( and a smlar pay-as-you-drve system s beng tested n Brtan ( 13 An open legal ssue s whether records could be used as evdence n a prosecuton of the drver after an accdent. In the feld trals reported here, a contract was sgned that declared that the ndvdual records 24

25 benefts, may therefore be consderable (Hultkrantz 2004). Ths s, however, nothng that can be left to the ndustry but a development that calls for elaborate governmental polcy makng. References Carsten, O.M.J. and Tate, F.N. (2005). Intellgent Speed Adaptaton: Accdent Savngs and Cost-Beneft Analyss. Accdent Analyss & Preventon 37(3): Donne, G., N. Doherty & N. Fombaron (2000). Adverse Selecton n Insurance Markets. In G. Donne (ed.). Handbook on Insurance. Kluwer. Fnch, D.J., Kompfner, P., Lockwood, C.R and Maycock, G. (1994). Speed, Speed Lmts and Accdents. TRL Propject Report 58, Transport Research Laboratory, Crowthorne, UK. Harrson, G. and J. Lst (2004). Feld Experments. Journal of Economc Lterature, Vol. XLII (December), pp Hultkrantz, L. (2004). Voluntary Road Prcng. Workng Paper 2004:5, Department of Economcs, Örebro Unversty. Hultkrantz, L. & G. Lndberg (2004). Intellgent Economc Speed Adaptaton. Workng paper, Swedsh Natonal Road and Transport Research Insttute. Klepnger, D.H., Johnson, T.R, and Joesch, J.M. (2002). Effects of Unemployment Insurance Work-Search Requrements: The Maryland Experment. Industral & Labor Relatons Revew 56(1):3-23. Moore, D. S., and McCabe, G. P. (2003). Introducton to the Practce of Statstcs, fourth ed. New York: W. H. Freeman and Company. Nash, C. & B. Matthews, eds. (forthcomng). Measurng the Margnal Socal Cost of Transport. Macmllan. OECD (2003). Road Safety. Impact of new technologes. Parry, I.W.H. (2004). Comparng Alternatve Polces to Reduce Traffc Accdents. Journal of Urban Economcs 56: Royalty, A.B. and Hagens J. (2005). The Effect of Premums on the Decson to Partcpate n Heatlht Insurance and Other Frnge Benefts Offered by the Employer: Evdence from Real- World Experments. Journal of Health Economcs 24: ultmately belonged to the drver. Fortunately, whether ths actually would protect the drver n a court case has not come to a test. 25

26 Thomas, F. (2005). Wllngness-to-accept safety-enhancng devces n cars: A feld experment to nduce drvers to use an mpure publc good detals of the full probablty model and the MCMC approach. Workng paper, Swedsh Natonal Road and Transport Research Insttute. Wnter, R.A. (2000). Optmal Insurance under Moral Hazard. In G. Donne (ed.). Handbook on Insurance. Kluwer. Vägverket (2002) Borlänge Resultat av ISA-försöket, avalable at World Health Organsaton (2004). The World Health Report 2003: Shapng the future. 26