Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles

摘要

The paper examines a class of phenomena that combine adverse networkeffects with moral hazard, using the motor vehicle market as an exampleto develop and illustrate the key concepts. It is hypothesized thatconsumers behave as if there is a network externality with respect tovehicle size: the more large vehicles there are on the roads, thegreater a consumer’s propensity to seek protection from them bydriving a large vehicle herself. One consequence of this is that motorvehicle manufacturers are discouraged from making large vehicles lesshazardous to other motorists. The paper measures the network effect andconsequent moral hazard using disaggregate data on choice of vehicletype and related household characteristics, combined with a state-levelmeasure of the incidence of traffic fatalities. The results show thatfor each 1 million light trucks that replace cars, between 961 and 1,812would-be car buyers decide to buy a light truck instead, in reaction tothe increased risk of death posed by the incremental light trucks. Thisnetwork effect, when run in reverse, creates egregious incentives forvehicle manufacturers: for every life saved due to safety innovationsthat make light trucks less deadly to other motorists, manufacturers canexpect to sell about 31 fewer light trucks.