Poking economists can be risky

When I got annoyed about BERL's work on the "social costs" of alcohol and wasn't impressed with their response to critiques, things got interesting.

Now it seems that John Small is a motorcycle rider. And he's started digging into ACC's justification for massive increases in insurance levies on motorcycle registrations. And he doesn't like what he's finding. I hope for ACC's sake that they're able to quickly show him what they were up to, or that Small doesn't get a lot of consumption value out of annihilating shonky analyses that justify imposing costs on him. 'Cause as mildly irritating as I was for BERL, I'm sure Small would be far more irritating for ACC.

It makes sense that bikes would have to pay a bigger fixed cost than cars even if risks per mile driven were identical across the two vehicle classes: bikes use less petrol per kilometer, and ACC charges a petrol levy of 9.9 cents per litre to reflect the added risk per additional amount driven. They can't charge differential petrol taxes per vehicle, so it has to get loaded into the fixed charge. Given that, though, it would take remarkable differences in accident risk/damage by type of motorcycle to generate the fixed charge difference between small and large bikes that ACC proposes: $257 for a <125cc bike and $745 for >600cc. The larger bikes use more petrol per kilometer than the smaller bikes.

Small is definitely right that there's a bias against motorcyclists built into the system, but the optimal tariff structure given an untaxed segment is pretty difficult. First best, we eliminate the untaxed segment: we can and should put an ACC levy on cyclists. It would be fairly easy to require a rego for cyclists and to charge an appropriate ACC premium for them (risk rated for type of bicycle, whether there's a kid's seat, etc). Doing it for pedestrians would be pretty tough. The only way of doing it, best I can reckon, would be through a poll tax added onto your regular income tax, perhaps risk rated by number of pedestrian accidents in your neighbourhood. In that state of the world, premiums could reasonably reflect the two-sided nature of accident costs (a car-bicycle accident needs both the car and bicycle present).

Outside of that state of the world, whenever a bicyclist gets on the road, the ACC premium for any vehicle that can injure a cyclist, even if it's one of those horrible cyclists that plug up Riccarton Road going through Hagley Park despite the existence of perfectly good cycle paths going through the park paralleling the road (hates them I do), goes up. So the bias is really on any segment that is taxed compared to the untaxed segment. We'd then expect, though, that trucks and buses would have a heavier charge attached to them -- they do more damage to the untaxed segment in any encounter between the two. Small says trucks are getting a pretty sweet deal. Given that diesel trucks don't pay a petrol levy, he's almost certainly right; would need more details on accident rates to be sure though.

That's enough for now - I'm off for a ride.

If I were ACC, I'd be rather nervous about the "for now" part. Sounds like there's a fair bit he could take a sledgehammer to, were he so inclined.

Motorcycles

Patri Friedman will think less of you if you drive a motorbike: they're just too risky. He cites stats of fatality rates twenty times those of automobiles, corrected for miles driven.

But those numbers don't correct for agent type. What he really needs, and what I don't think exists, is data on relative fatality rates for risk-averse drivers in both types of vehicles. I'm sure motorcycles are still riskier, but twenty-times riskier, correcting for agent type?

Specify that there's an underlying distribution of risk-aversion running from highly risk averse to highly risk/thrill seeking. And, suppose agents sort across vehicle class by underlying risk aversion. So the most risk-averse agents buy a Volvo, the median agent buys a Toyota, and the most risk-preferring agent buys a motorbike. If we then find that motorcycles have higher fatality rates than cars, I don't know what portion of the difference comes from agent heterogeneity and how much comes from motorcycles being more dangerous.

How could you tell? Well, one way would be to check the proportion of motorcycle riders with health insurance as compared to car drivers. David Hemenway's propitious selection story suggests that risk preference is correlated across different types of behaviour, so adverse selection stories in insurance are overstated: he finds that motorcycle riders in accidents without helmets are more likely to be uninsured than those who wore helmets. In other words, folks who like risk take more risks. So, get some measure of risk preference derived from health insurance status (or life insurance, or credit rating, etc), use it in probit estimation for the likelihood of being in accident, then adjust the motorcycle stats for underlying agent type. It would be a big job, and I'm not going to do it, but it would be a cool paper for somebody who had ready access to the data.

So, to the extent that Patri is right to cast aspersions on motorcycle riders, it's because it might be an efficient signal of underlying agent type. But Patri, if you already have all kinds of other signals about somebody's underlying type, perhaps don't downgrade an otherwise risk-averse person quite as much as you otherwise would: it's highly unlikely that they're facing a 20X average risk.