I vividly remember reading the original article by Austan Goolsbee.
Question: when Lake Shore Drive in Chicago is jammed with traffic, why do bus drivers in Chicago wait on the Drive when they could get off, and return to the Drive a few miles further on?
Why don't the bus drivers use the shortcuts? Surely they know about them—they drive the same route every day, and they probably avoid the traffic when they drive their own cars. Buses don't stop on Lake Shore Drive, so they wouldn't strand anyone by detouring around the congestion. And when buses get delayed in heavy traffic, it wreaks havoc on the scheduled service. Instead of arriving once every 10 minutes, three buses come in at the same time after half an hour. That sort of bunching is the least efficient way to run a public transportation system.
Companies in Chile pay bus drivers one of two ways: either by the hour or by the passenger. Paying by the passenger leads to significantly shorter delays. Give them incentives, and drivers start acting like regular people do. They take shortcuts when the traffic is bad. They take shorter meal breaks and bathroom breaks.
They also create new markets. At the bus stops in Chile, people known as sapos (frogs) literally hop on and off the buses that arrive, gathering information on how many people are traveling and telling the driver how many people were on the previous bus and how many minutes ago it sat at the station. Drivers pay the sapos for the information because it helps them improve their performance.
Not everything about incentive pay is perfect, of course. When bus drivers start moving from place to place more quickly, they get in more accidents (just like the rest of us). Some passengers also complain that the rides make them nauseated because the drivers stomp on the gas as soon as the last passenger gets on the bus
The report shows that they have 10.03 accidents per million kilometers travelled, compared to just 5.98 accidents per million kilometers travelled on the Chicago-style buses. That's a huge difference, which can't be shrugged off by saying that they are "moving from place to place more quickly". The pay-per-passenger system means that drivers have a very strong incentive to overtake the bus in front of them, and pick up all of the passengers which the bus in front would otherwise get. So they are likely to drive more aggressively, and less safely.
Once a bus finally does stop, the driver quickly gets the bus moving at full speed, often in complete disregard for the stability or comfort of the passenger. These rapid stops and quick accelerations can occur for the entire duration of the trip
When a passenger is waiting at a stop alone, sometimes the driver won’t stop because the opportunity cost of the time spent picking up that passenger is greater than the income from the fare. In fact, often times a single passenger waiting will have to wait for several buses or until more passengers arrive at the stop.
Goolsbee is downright wrong when he says that "when given the choice, people overwhelmingly choose the bus companies that get them where they're going on time." The citizens of Santiago are not "given the choice" between bus services running on a per-passenger or per-hour basis. Some bus routes pay one way, other bus routes pay the other. You take the bus which goes to your destination.
In 2006 Santiago will complete a dramatic overhaul of its bus system. The plan, called Transantiago, will replace the current system of disorganized owners with a dozen or so large companies. Partially influenced by conclusions of this research, drivers will all be paid a fixed wage.
This bus decision is a federal govt decision or a city govt decision? The federal government people predominantly have Ph.D.s from here at U. Chicago (and indeed I taught several of them Ph.D. Public Finance). My impression was that this was more of a city level thing. No question that I would predict that this new system will lead to more delays and the concentration of ownership to higher prices. We will agree to revisit this issue in a year and see if it was born out. I am prepared to admit that the incentives didn't work if that doesn't happen.
Almost overnight, the new "planned" system cut mass transit ridership, increased congestion everywhere in the city, and tripled average commute times from forty minutes to two hours. As President Michelle Bachelet later said in a speech, "It is not common for a president to stand before the nation and say 'Things haven't gone well.... But that is exactly what I want to say in the case of Transantiago.... The inhabitants of Santiago, especially the poorest, deserve an apology."The roll-out was not a total disaster, however. The new planned system did solve one of the major problems it had targeted: profits were eliminated overnight. Where the old system had made $60 million a year, the new planned system immediately began to lose, and has continued to lose, more than $600 million per year.