In the motorcycle taxi market in Sub-Saharan Africa, the relation between the owners and the drivers is characterized by a principal agent problem with the following features: (i) the principal cannot observe the final output of the agent and therefore cannot condition his wage on it. (ii) The high effort from the agent depreciates the asset. These two features (i) and (ii) imply that the principal ideally wants the agent to exert as little effort as possible, while still leasing the asset from him.
The problem with low effort implementation is that the asset will not generate enough revenue. I analysis the contractual arrangements between the owners and the drivers in this market and use a survey data to address the determinant of the contracts and their implications. I show that trust between the principal and the agent can lead to the choice of a socially sub-optimal contract because of moral hazard problems.
The other contracting problem in motorbike taxis: how much does a foreigner pay? The key thing: never ask the price. Everyone knows the price, and if you have to ask, it’s like wearing a sign that says “Please charge me five times the going rate.”
My strategy is to just ask someone the rate structure in advance, then pay the driver slightly more. But the key is to self-assuredly hand the money over at the end and say thank you. You’ll get smiles and no more arguments.
(Some of you may say, “You are so insane as to take motorbike taxis in Africa?” to which I reply, (1) chill out, and (2) you have not seen Kampala car traffic. Cars get snarled so long in traffic there are now shoe salesmen by the roadside. You have time to try on many, many pairs.)