Thursday, June 26, 2008

Bad news for bad drivers

In car insurance, the problems of adverse selection (high risk drivers more likely to buy insurnace) and moral hazard (once you have insurance, you are less careful) are due to information asymmetry. Now technology has allowed car insurance companies to "see" how risky you are and how poorly you drive, and charge you accordingly.
Drivers who participate in these plans have devices installed in their cars that, depending on the technology used, can track the number of miles driven, the speed at which cars are driven and even how often and how hard the brakes are used. By allowing their habits behind the wheel to be monitored, drivers get lower insurance rates -- or pay higher premiums if they're lead-footed road hogs.
Good drivers (about 2/3 of us) would pay about $270 less each year. These devices also pave the way for a carbon tax.
With pay-as-you-drive insurance, drivers in the U.S. would reduce their mileage by about 8%, with $51.5 billion in social benefits mostly from reduced congestion and accidents, according to the Hamilton Project.

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