How Effective Are Non‐Monetary Instruments for Safe Driving? Panel Data Evidence on the Effect of the Demerit Point System in Denmark

• DOI: http://doi.org/10.1111/sjoe.12235
• Date: 01 July 2018
• Published date: 01 July 2018

©The editors of The Scandinavian Journal of Economics 2017.

Scand. J. of Economics 120(3), 894–924, 2018

DOI: 10.1111/sjoe.12235

How Effective Are Non-Monetary

Instruments for Safe Driving? Panel Data

Evidence on the Effect of the Demerit Point

System in Denmark*

Kibrom A. Abay

University of Copenhagen, DK-1353 Copenhagen K, Denmark

kibrom.araya.abay@econ.ku.dk

Abstract

Using unusually rich longitudinal data on traffic offenses, this paper exploits a reform

that introduced a point-recording scheme in Denmark to estimate the behavioral responses

of drivers to a non-monetary penalty based on demerit points. We find that drivers

exhibited substantial behavioral responses to each demerit point assigned to their driving

licenses. We also find that drivers’ efforts, and hence responses, increased with the

number of demerit points they accumulated. Depending on the number of demerit

points accumulated, drivers with one or more demerit points reduced their frequency

of traffic offenses by 9–34 percent.

Keywords: Behavioral response; deterrence; demerit points; non-monetary penalties; point

recording; public road safety

JEL classification:D12; H76; K42; R41; R48

I. Introduction

Traffic accidents represent one of the largest externalities and social costs

of the transport sector. Driving behavior plays a central role in instigating

and exacerbating the consequences of traffic accidents. For instance, the

US National Highway Traffic Safety Administration (NHTSA) estimates

the economic cost of speeding-related crashes to be 40.4 billion US dollars

each year (NHTSA, 2012). Therefore, affecting the driving behavior of

individuals remains a top priority for policymakers around the globe.

Standard economic and deterrence theory predicts that rational drivers will

respond to policy instruments (or reforms) that increase the expected cost

of committing traffic violations (Becker, 1968; Polinsky and Shavell, 1979).

*This paper benefited from comments by Mette Ejrnæs, Søren Leth-Petersen, Jean-Marc

Bourgeon, Georges Dionne, Benjamin Hansen, Michael Makowsky, Jean Pinquet, Bertel

Schjerning, and Goytom Abraha Kahsay. Two anonymous referees and the editor provided

valuable comments on an earlier version of the paper.The author g ratefully acknowledges the

financial support from the Danish Council for Independent Research (DFF-grant: 1329-00007).

K. A. Abay 895

Following this justification, both monetary and non-monetary penalties

are commonly used as key instruments to ensure public road safety. The

most common monetary instruments involve traffic tickets (fines), whereas

driving license revocation based on point recording is a recently emerging

non-monetary instrument for safe driving.

Many developed countries now use different variants of point-recording

schemes for drivers who violate traffic rules.1In some countries, this

point-recording scheme is integrated into insurance premiums (Dionne

et al., 2013). Thus, the point-recording scheme serves as an incentive

for safe driving by increasing the expected pecuniary cost in terms of

forgone income associated with the loss of driving privilege or through

indirect costs on insurance premiums and license redemption. Although

the implementation of the point-recording system varies across countries,

it is common that accumulating demerit points above some threshold in

some specified period leads to revocation of the driving license. Denmark

introduced the demerit point system (DPS) in September of 2005. The

point-recording scheme in Denmark applies to different types of traffic

violations, and accumulating three demerit points in three years leads to

conditional suspension of the driving license.2

While policy instruments such as fines and the point-recording scheme

have long been used, little is known about the effect of these instruments

on inducing safe driving and improving public road safety. This is mainly

because most of these instruments are endogenously introduced, which is

a problem that saddles evaluation techniques with simultaneity and reverse

causality problems. A few recent studies, including those of Bourgeon and

Picard (2007) and Dionne et al. (2011), provide theoretical foundations

on the efficacy of the point-recording scheme. Bourgeon and Picard

(2007) present a theoretical model that demonstrates the effectiveness

of the point-recording scheme in different scenarios. Dionne et al. (2011)

extend the model of Bourgeon and Picard (2007) by linking the point-

recording scheme to insurance pricing; they also provide some empirical

evidence of moral hazard in public road safety. Despite their innovative

empirical approach to test the prevalence of moral hazard in public road

safety, Dionne et al. (2011) do not simultaneously capture (or disentangle)

unobserved heterogeneity and behavioral response (moral hazard).

This paper uses unusually rich longitudinal data on traffic offenses

in Denmark to estimate the effect of non-monetary penalties on driving

behavior. These longitudinal data on traffic offenses enable us to follow

1For instance, 21 out of the 27 member states of the European Union havealready implemented

some form of the demerit point-recording scheme (SWOV, 2012).

2A long list of traffic offenses that trigger demerit point assignment can be found at

https://www.sikkertrafik.dk.

©The editors of The Scandinavian Journal of Economics 2017.