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Insurance markets in everything, getting caught edition
"My favourite ticketing system was in Mumbai, India," Kim enthuses. "No one actually buys a ticket, but you can buy 'ticket insurance' from private entrepreneurs who work at the entrance of the station. The 'ticket insurance' is about half the price of a regular rail ticket. It gives you a guarantee that, in the extraordinary event that you are booked by a railways inspector for taking a free ride, your fine will be paid. A relative was once booked and the ticket insurer paid the fine exactly as promised."
Here is the link, and thanks to Brendan Leary for the pointer.
Posted by Tyler Cowen on August 1, 2007 at 01:38 PM in Economics | Permalink
Comments
that is awesome...the problem would be if they assess 'points' against you (like we do with driver's licenses); this guy can't take your points away...
Posted by: shawn at Aug 1, 2007 2:01:18 PM
I'm surprised that the train doesn't check a little harder. It can't cost that much to have a couple conductors run up and down the train to get everyone. Based on the insurance prices it sounds as though they check well under half of them.
Posted by: nelsonal at Aug 1, 2007 2:17:20 PM
Nelsonal,
From your comment, I guess you haven't really heard of the Mumbai rush hour trains. :)
Have a look : http://www.theworldisnotflat.com/tags/amazing
Posted by: at Aug 1, 2007 2:30:52 PM
Unless the fine is enormous, buying this insurance is irrational; see Rabin's calibration theorem.
Posted by: anonymous at Aug 1, 2007 2:33:37 PM
anonymous:
Theory without regard to reality is useless, and I am sorry to say, your post is a classic example! Have you heard or seen how densely packed the Mumbai trains are?! (See the previous link for example) Do you still think it is "irrational" for the people to buy this insurance instead of the actual ticket when the chance of a railway inspector being able to walk through this maze of people and actually have time to check everyone's tickets are really, really, really miniscule? The people are making a perfectly rational choice.
Posted by: sam at Aug 1, 2007 2:39:32 PM
anonymous:
Upon rethinking about your comment, I have decided to give you the benefit of the doubt.
If you are saying it is irrational to buy insurance as opposed to actually buying the ticket, my previous post stands.
If on the other hand you are saying that people should just ride free without buying ticket or insurance, I agree with you completely.
Posted by: Sam at Aug 1, 2007 2:42:30 PM
All insurance is "irrational" in the sense that unless the cost of the insured event will break you you're better off self insuring.
I remain surprised that the train company hasn't figured out a way to more effectively charge for a ticket. If the insurance on a fine is half the price of a ticket than the odds of them paying are probably less than 5-10% (capital is likely fairly expensive in that business and it's unlevered). Their cost of capital is low enough (and borrowing isn't that hard in India anymore.
The crowds would cut down (boosting safety records) and the train operator would make money.
Posted by: nelsonal at Aug 1, 2007 2:56:01 PM
I suppose the remaining opportunity here is passengers who buy insurance to tip off conductors that they are traveling without a ticket. They would get a small pay off from the conductor for confessing their crime, the conductor's perceived performance would go up for giving out more fines, and the passenger would turn the fine over to the insurers. This would drive up their cost of operating...
Posted by: David at Aug 1, 2007 3:24:57 PM
This sort of arrangement is a very rational and effective way of charging fares if people have any integrity. When the local commuter train in Silicon Valley, California went to this system a couple of years back there was no detectable loss of revenue at all. None.
Buying insurance is irrational once you've decided that you plan to pilfer ridership, unless the fine is an insurable amount, meaning that it drives you out of the risk neutral part of your utility curve.
David, your opportunity [where the conductor gives a confessor a small kickback] doesn't work or doesn't work well enough to kill the insurance market because the conductor doesn't capture enough of the fine to give you a big enough kickback to make it worth your while. This isn't the sort of country where civil servants get performance-based raises. Note that passengers who buy insurance prefer having insurance to going bare, and have a small incentive to keep the insurance market healthy.
The railroad could kill the insurers by institutionalizing confessions to the conductor. If you do that, you pay the fine and get a receipt from the court for having paid the fine which you turn in to the insurance company -- and then you get half of the fine back in the mail a few weeks later.
People who correctly decide that insurance is a bad buy can get a nice piece of change by turning vigalante, and even people who like insurance may rat out their own insurer because of the free rider problem. The insurance folks can fight back a little by refusing to pay a particular client more than, say, five times, but that's hard to deal with in a country like that and the fines are likely to be big enough that even a few acts of vigilantism are worth doing.
-dk
Posted by: Dick King at Aug 1, 2007 4:11:49 PM
The real problem seems to be an enforcement one. Instead of trying to find MORE deviants, perhaps the punishment should be made more difficult to insure against. Something like convenience (get caught, spend five hours in detention, or something). Combined with lower prices for tickets it might reduce deviance, since people tend to choose to be on the side of the law if cheap enough.
Alternate solution: undercover ticket insurers who fail to pay up.
Posted by: Link at Aug 1, 2007 4:29:21 PM
I remember from my Bombay days that people who travel longer than 30-40 minutes choose places away from the doors and read or play cards. Some commute from Poone and it takes about 3 hours and some fathers do not see their children except during weekends. D.D. Kosambi is to commute from Poone and it is rumoured that some of his books were written on those trains.
Posted by: gaddeswarup at Aug 1, 2007 5:07:26 PM
Why wouldn't the train company just double the size of the fine?
Posted by: Barbar at Aug 1, 2007 5:20:39 PM
Mumbai insurance appeared earlier in some of these blogs.
Posted by: ponmel at Aug 1, 2007 6:03:31 PM
Mumbai insurance appeared earlier in some of these blogs.
Posted by: ponmel at Aug 1, 2007 6:04:02 PM
In Rome people dont pay and they dont even need insurance.
Posted by: JEAN at Aug 1, 2007 8:49:57 PM
Back in my college days in India, when traveling over the weekends to the nearest big city by train, very few people bought tickets at all.
If you got caught, which was less than 10% of the time, you simply paid the spot-fine (about 3 times the original fare). Overall you saved money by paying occasional fines compared to purchasing tickets all the time.
Posted by: bongopondit at Aug 2, 2007 12:27:28 AM
Clearly the railroad isn't fining people enough for travelling without a ticket, or ... they don't check often enough. The theory here is that people should find it cheaper on average to buy the ticket. But as my Mumbai friend says "prob. you get caught 1 off 5 times ... and the fine is 1.5 times the ticket cost".
Posted by: Russell Nelson at Aug 2, 2007 2:34:55 AM
Whos says the train company is not very happy with the current system? They probably get a serious fraction of their revenue from the fines, and the insurance system makes sure people won't argue when caught.
If the fines are twice normal price, and you get caught once in ten times, real prices are simply a fifth of the advertised price. This is probably how the train company sees it. Insurance sellers are then basically outsourced ticket salesmen.
Also, in a country where trains are absolutely essential for the economy, governments have good reasons to keep it cheap.
Posted by: Marius at Aug 2, 2007 3:37:45 AM
"Whos says the train company is not very happy with the current system? They probably get a serious fraction of their revenue from the fines, and the insurance system makes sure people won't argue when caught."
It may be, too, that this is a sort of useful price discrimination -- those who can afford full-price tickets, pay full price to avoid the hassle of being caught and fined. Those too poor to pay full price, go the insurance route, and the train company gets maybe half price from those riders.
Posted by: Slocum at Aug 2, 2007 7:04:14 AM
Does the insurer ride the train to make sure the claim is valid?
If not, then he must rely on a receipt the inspector gives the rider who is without a ticket. But then a receipt has value even if you don't have insurance. You can sell it to someone who does. So the insurer is going to end up paying off on most of the policies.
Is this an apocryphal tale, or are people who are willing to cheat the railway by riding without paying unwilling to cheat the insurer?
Posted by: Bernard Yomtov at Aug 2, 2007 9:12:03 AM
I am sure this is a made up story. I lived in Bombay (now Mumbai) for 6 years and took the local (that's how suburban trains are called there) almost everyday. Checking for tickets was routine and lines at the ticket counters were long in the stations I frequented.
Posted by: Ramesh at Aug 2, 2007 11:06:25 PM
Ramesh, my friend Sumit was born and raised in Mumbai. He says that he's bought such insurance.
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Posted by: div at Aug 3, 2007 1:00:48 PM
This reminds me of a friend of mine who doesn't pay for a spot in a parking deck, but instead parks illegally in the alley behind his apartment. He gets ticketed about 2 or 3 times a week, and pays the fines diligently. The fines are cheaper than paying for a parking spot.
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