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Ulric B. and Evelyn L. Bray Social Sciences Seminar

Tuesday, November 8, 2022
4:00pm to 5:00pm
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Baxter Lecture Hall
Search Frictions and Efficiency in Decentralized Transport Markets
Giulia Brancaccio, Assistant Professor, Department of Economics, Stern School of Business, New York University,

Abstract: We explore efficiency and optimal policy in decentralized transport markets, such as taxis, trucks, and bulk shipping. We show that in these markets, search frictions distort the transportation network and the dynamic allocation of carriers over space. We derive explicit and intuitive conditions for efficiency, and show how they translate into efficient pricing rules, or optimal taxes and subsidies for the planner who cannot set prices directly. The results imply that destination-based pricing is essential to attain efficiency. Then, using data from dry bulk shipping, we demonstrate that search frictions lead to a sizeable social loss and substantial misallocation of ships over space. Optimal policy can eliminate about half of the welfare loss. Can a centralizing platform, often arising as a market-based solution to search frictions, do better? Interestingly, the answer is no; although the platform eradicates frictions, it exerts market power thus eroding the welfare gains. Finally, we use two recent interventions in the industry (China's Belt and Road Initiative and the environmental initiative IMO 2020) to demonstrate that taking into account the efficiency properties of transport markets is germane for any proposed policy.

For more information, please contact Letty Diaz by phone at 626-395-1255 or by email at [email protected].