Search Frictions and Efficiency in Decentralized Transport Markets

Abstract

We explore efficiency and optimal policy in decentralized transport markets, such as taxis, trucks and bulk shipping. We show that in these markets, search frictions distort the transportation network and the dynamic allocation of carriers over space. We identify the sources of externalities, derive explicit and intuitive conditions for efficiency and show how they translate into efficient pricing rules or optimal taxes and subsidies for the planner who cannot set prices directly. Using data from dry bulk shipping, we find sizeable social loss and spatial misallocation of carriers. Optimal policy restores efficiency by favoring locations that are central in the trade network and might be preferable to centralization.