Efficiency and traffic safety with pay for performance in road transportation

Abstract

We propose a theoretical model in order to study the behavior of a road transport company and a driver. The driver is supposed to face a pay for performance contract. The expected profit for the company and the expected utility for the driver depend on the input chosen by themselves and the other actor. By analyzing the possible interaction going on between the actors in a simultaneous game and the two possible leader-follower games, it is seen that the efforts could be strategic complements, independent or strategic substitutes. In cases where the efforts are strategic complements, and the expected profit for the company and the expected utility for the driver are increasing in the other actor's effort, leader-follower games trigger higher accident risks than the simultaneous game. If efforts are strategic complements, and the expected profit and utility are decreasing in the other actor's effort, leader-follower games produce lower accident risks than when the actors move simultaneously. Presuming that the transport company is the principal and the driver is the agent, we deduce an optimal pay contract. The optimal contract is characterized by a pay for performance contract where the driver's share of net revenue becomes higher the higher influence a marginal increase in her effort has on the net revenue, the lower influence a marginal increase in her effort has on the probability of accidents, and the lower the loss the company experiences if an accident occurs. When such a contract is used, the driver faces a situation where the transport company's interests are perfectly internalized, meaning that the company also maximizes the sum of the expected profit and utility. However, since accidents also mean costs for others apart from the driver and the company, public regulation is needed to ensure overall welfare.