Incentive Mechanisms for Safe Driving: A Comparative Analysis with Dynamic Data

Road safety policies often use incentive mechanisms based on traffic violations to promote safe driving-—for example, fines, experience rating, and point-record driver's licenses. We analyze the effectiveness of these mechanisms in promoting safe driving. We derive their theoretical properties with respect to contract time and accumulated demerit points. These properties are tested empirically with data from the Quebec public insurance plan. We find evidence of moral hazard, which means that drivers who accumulate demerit points become more careful because they are at risk of losing their license. An insurance rating scheme introduced in 1992 reduced the frequency of traffic violations by 15%%. We use this result to derive monetary equivalents for traffic violations and license suspensions. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.