Parisian Taxis and Moral Hazard

How to turn your slow driver into Fernando Alonso

Upon arrival to Paris last week, my Dad and I approached a taxi driver at Charles de Gaulle. My dad said—with a perfect accent, “Hyatt Regency Paris Étoile,” to which the driver replied, “Fifty-three euros.” We agreed, and the driver proceeded to drive like he was F1 driver Fernando Alonso, running stop signs, braking late, speeding on the highway, and maintaining less than one second of following distance on the highway. After a few minutes of this madness, the economics of the situation dawned on me. With a pre-agreed price, the driver had no incentive to drive slow or take the long way to our hotel. The faster the driver could finish his route, the faster he could take the next person. This leads to more rides for people and lower prices, which are huge efficiency gains. This form of pre payment removes the moral hazard from the transaction. On the downside, the aggressive driving does increase the chance of a wreck, so not agreeing on the price beforehand might give you a smoother ride.

Another interesting interaction happened on our way back to the airport. As we pulled away from the hotel our driver said, “Only cash!” My dad and I didn’t have enough cash, so we said, “We can’t pay,” and tried to get out of the taxi. Our driver sped off without warning, and started driving us to the airport. We awkwardly sat in the back, wondering if he didn’t understand our English. Then we saw him pull out a card reader from under the passenger seat. That’s when it hit us. He didn’t want to pay the card fee. So next time you are asked to pay cash for a taxi, say you don’t have any and try to get out. You are likely to witness some magic, as the driver conjures a card reader out of thin air.