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. The authors analyze the effectiveness of these mechanisms in promoting safe driving. They 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. They 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%. They use this result to derive monetary equivalents for traffic violations and license suspensions. (Author/publisher)
Abstract