One Problem, Two Solutions

February 25, 2010

You’ve probably been driving behind a truck that had a sticker on the back that read “How’s My Driving? Call 1-800-SAFE-RIDE”, or something to that effect. Today, I saw a sign that I haven’t seen before, pictured below:

“Top Speed Set at 60: It saves fuel and reduces emissions”

These two signs are really two solutions to the same problem, which, briefly, is this: if I am running a company that makes lots of truck deliveries, I will likely own many trucks, and I need drivers for those trucks. But since I own the trucks and the drivers I hire don’t, my drivers don’t have the same incentives I do to keep those trucks safe and in good condition. Furthermore, since these are drivers, the very nature of the job entails that I can’t watch them all the time, to make sure that they are behaving responsibly.

As the truck owner, then, these two signs help me overcome the problem. The “How am I driving?” sign relies on other drivers to do the monitoring for me. I hope that if my driver is being reckless and irresponsible, other drivers will call and tell me about it. It’s not free, because I now have to hire someone to answer the phones, record complaints, and transmit the information to me. But it’s cheaper than riding shotgun with the driver on every trip.

Putting a 60 mph “governor” on the truck is a technological solution. One behavior associated with reckless driving is driving very fast. Of course, those of us who have ever driven above 60 mph know that it is also useful, but as the truck owner, I have to make a decision about whether the loss from not being able to drive faster than 60 mph outweighs the potential gain of ensuring my drivers can’t go at speeds that make them likely to get in accidents. Another behavior associated with reckless driving is quickly changing lanes without warning other drivers about what you are doing. To overcome this problem, an owner might install a device that doesn’t allow the car to make turns, ever. But that would likely discourage too much of the behavior that the owner ultimately wants drivers to engage in.

These types of problems are generally called “principal-agent” problems, in which the principal (here the owner) has interests that differ from those of his agent (the driver). There are obvious benefits to cooperation and delegation of tasks to different people; that’s why we have truck drivers in the first place. These benefits do not come without complications, though, and if you look at some common business practices, you can see how the process of trying to find the right balance of rules and incentives plays out.

Addendum: Questions for Reflection:

What are the limitations on the two methods described above to overcome the principal-agent problem? In what circumstances would you expect the “How’s My Driving?” sign to work better? In what circumstances is the “60 mph” technological solution better?

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3 Responses to “One Problem, Two Solutions”

  1. Rrrobert! Says:

    My guess is that the 60 mph governor is primarily a fuel solution, though it of course does have ancillary safety benefits. In fact, my understanding of the debate about governors so far has been about how low you can set governors (for fuel efficiency) while preserving drivers’ ability to react fast in an emergency.

    Drivers’ and owners’ interests in the safety realm are basically aligned – neither the driver nor the owner wants to get in an accident. (Obviously, there are probably differences in the scale of their concern, which is one reason for the how am I driving signs). But drivers’ incentives are totally at odds with owners’ as regards fuel efficiency: drivers are paid by the mile, not the hour, don’t pay for fuel, and spend less time in the truck if they go faster. Also, having recently driven through South Dakota, let me tell you: it would take inhuman restraint to voluntarily drive through that state at 55 mph.

    Of course, there are other approaches to this problem – some companies offer incentives for fuel efficiency, for instance – but governors are cheap, they’re a one-time cost, they aren’t subject to drivers keeping incentives up front in their minds – and you can advertise its greenitude.


  2. Sure. My guess was that safety was relatively more important than fuel economy, since the owner is liable for damage to the truck as well as medical bills for his employees. The driver still bears a cost, obviously, but that cost is less than otherwise.

    But of course, you’re just saying that a different kind of principal-agent problem is important, and principal-agent problems were the whole point of the post, so yeah, not much reason to argue about the relative magnitudes.

  3. Rrrobert! Says:

    Yup.


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