Spatial Equilibrium, Search Frictions and Dynamic Efficiency in the Taxi Industry Nicholas Buchholz ∗ December 9, 2019 Abstract This paper analyzes the dynamic spatial equilibrium of taxicabs and shows how common taxi regulations lead to substantial inefficiencies as a result of search frictions and misallocation. To analyze the role of regulation on frictions and efficiency, I pose a dynamic model of spatial search and matching between taxis and passengers. Using a comprehensive dataset of New York City yellow medallion taxis, I use this model to compute the equilibrium spatial distribution of vacant taxis and estimate intraday demand given price and medallion regulations. My estimates show that the weekday New York market achieves about $5.5 million in daily welfare split almost equally by customers and drivers comprising 182 thousand trips, but an additional 48 thousand customers fail to find cabs due to search frictions. Counterfactual analysis shows that implementing simple tariff pricing changes can enhance allocative efficiency and expand the market, offering daily net surplus gains of up to $420 thousand and 76 thousand additional daily taxi-passenger matches, a similar magnitude of gains generated by adopting a perfect static matching technology. Key Words: dynamic games, spatial equilibrium, search frictions, dynamic pricing, regulation, taxi industry JEL classification: C73; D83; L90; R12 ∗Department of Economics, Princeton University. Email:
[email protected]. This is a revised version of my job market paper, previously circulated under the title Spatial Equilibrium, Search Frictions and Efficient Regulation in the Taxi Industry. Special thanks to Allan Collard-Wexler, Eugenio Miravete and Stephen Ryan. I also benefitted from discussions with Hassan Afrouzi, John Asker, Austin Bean, Lanier Benkard, Laura Doval, Neal Ghosh, Andrew Glover, Jean-Fran¸coisHoude, Jakub Kastl, Ariel Pakes, Rob Shimer, Can Urgun, Emily Weisburst, Daniel Xu, Haiqing Xu, anonymous referees and numerous seminar participants.