Incentives of Ride Sharing Drivers

Back in the old, old days, when you hopped into a cab at the airport and asked to go to your downtown hotel, the cabbie would start out and then usually ask something like, "Have you been to this city before?" If you did not know your way, he might take the long way to increase the miles and the fare. The WSJ is reporting that some ride-sharing drivers are now taking longer routes too. 

Passengers aren't on the hook for the higher fare because they pay a fixed upfront price based on the app's estimate of the ideal route. And while drivers are encouraged to go the most direct route, they can choose to ignore their digital navigators for a route that tacks on extra miles. The drivers' pay is determined by the actual trip's mileage and time, which can vary based on traffic conditions or diversions.

In the taxi example, I quiz students on how taxi companies fixed this 'long-haul' problem. The simple solution was to set the fare to a per mile rate plus a fixed fee. By driving the shortest route, cabbies could save time, pick up more passengers and thus more of these fixed fees. I love that there was a simple contractual change to address the moral hazard problem. In the ride-sharing context, the problem may be too inconsequential to fix.

An Uber spokesman said the company estimates longhauling occurs on less than 1% of trips in the U.S.