Sunday, March 26, 2006

Bus Drivers Respond to Incentives

People respond to incentives--a basic principle of economics. Austan Goolsbee provides a good example here:

An excerpt:

Companies in Chile pay bus drivers one of two ways: either by the hour or by the passenger. Paying by the passenger leads to significantly shorter delays. Give them incentives, and drivers start acting like regular people do. They take shortcuts when the traffic is bad. They take shorter meal breaks and bathroom breaks. They want to get on the road and pick up more passengers as quickly as they can. In short, their productivity increases.