An Old Piece I Once Wrote

Yesterday in class, I referred to a piece I wrote about a year ago on trade rules. I think I was talking about taxes and subsidies, can’t remember, but I promised to post the piece up for those interested. Here is the piece.

“Brikama direct” as Rationing

Gomadi Yalla, nyaka hel and bugay (Atheism, Stupidity and Greed) are just a few words used to describe the decision of drivers to take certain passengers and leave others. For those who still do not have a clue as to what I am talking about, below is a concise explanation of the situation.

Taxi drivers, especially those plying the Westfield Brikama route have taken it to only take passengers either going to Tabokoto or Brikama. There are a host of towns and villages between Tabokoto and Brikama; Lamin, Banjulnding and Yundum to name just a few. This has caused a lot of stir amongst people and a number of reasons for why drivers are doing this have been given. The first is that drivers are no longer God fearing and hence are taking advantage of desperate passengers. The second is that they are not smart and do not know that they would make more money if they took Lamin and Banjulnding passengers. The third is that they are greedy and want to make more money than they should.

Each of these theories has a flaw. Taking the first, I find it hard to believe that drivers have always been motivated to do good for us. That they engage in driving for the good of the nation. That has never been the case nor is it now. I firmly believe they are as self interested as are we all are. The prospect of making a decent living is what has driven them to well... drive. On the second point, it would be a mistake to think that we know more about the business of driving than drivers. If we agree that an accountant knows more about book keeping and financial statements than a non accountant and carpenter knows more about making furniture from wood than someone who isn’t a carpenter. Why do we believe that we as a people know more about the business of driving than drivers? Another point that goes against this theory is linked to self interest. Drivers want to make more money. If they knew that they would make more money by switching their strategy (i.e. taking from Lamin and Banjulnding) then they would. If not every single one of them, most would.

The third theory, greed looks to hold up. The problem with this point is similar to that of the first. To claim drivers are greedy now is to claim that they were either not greedy before or less greedy. I won’t bore you with arguments about changes in population characteristics over time and the like, but to think that drivers alone of all Gambians have become greedier independent of all Gambians is quite hard to believe. As if there was a strange disease called greed that infects only Gambian drivers making them act in such a way, leaving the rest of us non drivers sounds a bit implausible.

Two thirds of the Gambia live on 17 percent of the country. That means that almost 1.2 million Gambians live between Banjul and Brikama. Imagine that more than half of these people have to either go to school, work or the market every morning. They also have to go back home every evening as well. Imagine also that there are not enough cars to move all these people at the same time. What does one do? In a free market, the price of entering a van would rise to the point that supply equated demand. Prices are a form of rationing and if prices do not adjust, then some other form of rationing must be done. This is where the Brikama direct comes in.

Drivers know that demand exceeds supply yet they cannot charge a higher fee. They also cannot increase capacity, meaning they cannot take more than their legal limit (in most cases 14 passengers). The aim of the driver would be to pursue a strategy that would minimize costs and or maximize revenue under this new environment. Given the nature of the passengers on the journey, the strategy that would reduce costs would be to take the passengers that would require the least stops. More stops would mean a longer journey and more fuel consumed. In terms of maximizing revenue, a driver would make more money by taking a passenger directly from Westfield to Brikama (D12) than by taking two passengers, one from Westfield to Lamin and another from Lamin to Brikama (D10).

During peak hours, i.e. morning and evening, drivers pursue this strategy of taking only “direct” passengers. This does not last all day as drivers return to taking passengers that are stopping en route during off peak hours.

This explains why drivers refuse to take certain passengers during rush hour whilst taking those same people when it is not rush hour. Someone would be tempted to interpret the driver’s decision to maximise profits by taking only direct passengers as greed, but the thinking of the driver is no different in rush hour than when it isn’t rush hour. This strategy is called profit maximization, and it is what every business tries to do. The excess demand has given drivers the power to choose who they will take. The inability of fares to rise means that another form of rationing must take place. In this case the rationing is “Brikama direct”.

Transportation in The Gambia Part 1

The other day, on my way to work, I had a lift. I live at Banjulnding and for those who live after Tabokoto, the site of throngs of people standing on the road early in the morning waiting for a van is nothing new. Not for the man giving me a lift- more used to using the Kombo Coastal road to work. His first reaction upon seeing all those standing at NTC Lamin was to ask “Are all these people waiting for a van?” I was fairly amused when I heard that question for it wasn’t something I expected to hear. To me it was so obvious that I barely even noticed it, it was a part of what one had to put up with to get to work.

Later that day I couldn’t help but think of the causes and possible solutions to that problem. As an economist, I thought to look at theory for an initial starting point. Two causes sprang to mind, Government regulation and Agency problems. Imagine to my surprise reading a news story a few days later online about a company being setup in The Gambia to deal with the latter problem. Here is the story about Fangsoto Transport Services. The basic idea of this company is to solve the agency problem that arises from vehicle owners hiring drivers to drive their vans.

Agency problem refers to a situation where the owner of an asset hires someone else to use that asset to make money. The owner of the asset Is the Principal and the one using the asset, the Agent. A classic example of a principal agent relationship is the limited liability company. The shareholders (agents) who do not run the company, own it, whilst the managers (agents) run the company but do not own it. In this relationship, there is a clear conflict of interest between the two parties. Both would like to have as much of the profits generated from the assets as possible. For every Dalasi the principal takes from the profits, there is D1 less for the agent and vice versa. This problem is further compounded by another problem, Moral Hazard. In using the assets of the Principal, the Agent knows that it will be very difficult for the principal to monitor him. He can therefore take more risk than he would otherwise take knowing that higher risks yield higher returns. The best part of it for the agent is that he will be taking risks with someone else’s asset. If it succeeds, he gains more, if it fails he loses nothing. This problem of the agent taking on more risk than he otherwise would have taken had he been monitored properly is called a Moral Hazard problem. The conflict of interest that occurs between the principal and the agent is called the agency problem.

In the case of the transport industry in The Gambia, the agency problem and moral hazard are closely intertwined. The inability of the owner of the van to observe the driver means that the driver can declare to have less income than he actually made, or work less hours. This has led owners to now hire apprentices that they trust to oversee the driver- this also has its own problems which I will talk about in another piece. There is no incentive for a driver to take proper care of the van knowing that it is not his. If the care breaks down, the cost of repairing it does not come from his pocket, therefore he can push the van to its limit in order to make more money for himself at no risk to him (although one can argue he is risking his life).

The Fangsoto Transport Services tries to solve these problems by being an intermediary. An intermediary is a person or institution that stands between two parties. In this case the principal and the agent.

“Once you sign an agreement with us, we take proper care of your vehicle, appoint a driver and will be responsible for maintenance services, and as the owner, you can collect your money on weekly, monthly

“Drivers do not have the trust and confidence in vehicle owners, which result to care free driving and carelessness in the manner to control such vehicle

They try to solve these problems- agency and moral hazard- by taking being able to select good drivers and to monitor them whilst they are working. Their ability to do these two at a lower cost than vehicle owners allows them to make a profit. I failed to mention earlier that monitoring is possible in a principal agent relationship. It is only that monitoring is prohibitively expensive and it eats into profits.

It’s great to see that the things we learn in class also apply to the real world. Something I have been trying to get my students to appreciate for some time now. Economic theory tells us that there are a number of ways that the agency problem can be solved. Making the incentives (in this case profit) of the principal and agent compatible is one way. Another is through the use of government regulation. It is great to see someone coming up with an idea to solve the problem whilst using the free market mechanism. I wish more people looked to solve society’s problems using market mechanisms instead of government intervention

Site Move

The University of The Gambia is now using Google apps (Google sites included). I have decided to move my work related posts to that site. For those students taking my courses, you can access the site here. I will still be maintaining this blog, but most of the posts will not be related to my UTG work but rather my personal writing and observations. I made a new year's resolution to write more, so I hope to post something at least once a week.