Myopic railroads

An alternative for customers of small railroads is information on safety inputs. Examples might be the average experience of the staff, the age and condition of equipment, and the level of safety-related expenditures. Information of this type will be especially useful in ameliorating the market failure due to myopia. Myopic railroads will tend to be inexperienced firms who do not have a long safety output track record to report on, or unscrupulous railroads who are cheating by deviating from their past safety performance. 

How many accidents does this railroad need to have in a given year before the FRA suspects that the preventive efforts of the railroad have declined and the expected number of accidents is greater than 100 There is not a clear-cut answer to this question. Clearly one increases the chance of detecting a myopic railroad if the critical value of the number of accidents was set at 107. This is technically known as minimizing the chance of a type II error. However, one also stands a one in four chance of falsely accusing a responsible railroad. This is known as a type I error. The reader will appreciate that there is a tradeoff between the sizes of the type I and type II errors. For this reason, statisticians typically use the five-percent significance level, which is to say that critical value above which the count of occurrences would only fall outside by pure chance once every twenty years. 

A different theory of safety is used when we look at operational safety. Here, safety is one of the attributes of the service offered by the railroad to its passenger and freight customers. It is an attribute of service that is desired by customers but costly to provide. There will be some economic equilibrium where desire and costs are matched. This equilibrium is described in chapter 11. However, this ideal equilibrium will only occur when five conditions hold that the railroad has no market power customers are well informed about the level of safety offered customers are rational in making choices about safety railroads are not myopic in their decision making and that accident costs imposed on bystanders are borne by the railroad. A market failure will occur when one, or more, of these conditions does not hold in the actual marketplace. Chapters 12 through 16 consider whether each of these five conditions holds in practice. 

Railroads are not myopic when considering the costs of prevention that occur in the present, and the consequent cost of accidents that occur at random times in the future and... 

The improved financial health of the industry has reduced, but not eliminated, concerns about myopic behavior. In the mid-1990s the Union Pacific Railroad acquired the Chicago and North Western Railway and the Southern Pacific System. The railroad grew in size by eighty percent. In an effort to recoup some of the costs of acquisition, and to demonstrate to shareholders that the acquisitions had improved profitability, the railroad took several cost-saving actions. Some of these actions, such as a reduction in the number of dispatchers and supervisors, had safety implications. Fortunately, from a societal point of view, this attempt to cheat backfired because the reduction in preventive effort quickly led to a visible increase in service delays and accidents. Shippers and the government became aware of the change in quality, and demanded that the railroad take action to remedy the situation. 

There are also genuine concerns that some small new railroads may be myopic due to inexperience. Albeit, that there is little empirical evidence that they pose a serious safety threat. Small railroads represent 3.2 percent of national train miles, and account for 3.8 percent of total railroad fatalities. While they do have higher rates of collisions and derailments, these are not translated into higher fatality rates. Low speeds of operation mitigate the consequences of many accidents. While some individual small railroads might give cause for concern, it is likely that the inexperience of new short-line railroads would be far down the priority list of railroad safety problems that need to be attended to. 

A possible consequence of unscrupulous myopic behavior is that railroads may use the cover of bankruptcy protection to avoid paying compensation to injured employees, customers and bystanders. A possible solution to this problem is to ensure that railroads have enough assets to provide for such payment or hold liability insurance. Insurance companies pool risk across various railroads and the other kinds of risks that they insure against, and therefore can pay out even if one of their clients is forced in bankruptcy. 

The other two reasons for direct safety regulation are less speculative. There is reason to believe that insurance companies are neither motivated, nor able, to monitor the preventive efforts of inexperienced firms. Hence premiums are not tailored to the preventive efforts taken. Inexperienced railroads will therefore not be motivated to make the correct trade-off between preventive efforts and future accident costs. There may be a role for government intervention to specify minimum acceptable safety standards so that inexperienced railroads do not act myopically. 

There is an additional benefit from defining minimum acceptable accident-performance measures. Responsible firms will be deterred from myopic behavior if there are clearly stated minimum performance standards that they can meet that would obviate scrutiny by the FRA. From a societal point of view it is much more beneficial to state these minimal objectives in terms of safety outputs rather than by the existing system where acceptable performance is stated in terms of the minimum quality and quantity of safety inputs. The benefit comes from the ability of railroads to use their managerial ability to achieve at least the minimum level of safety by using the most efficient combination of safety inputs. 

Of course, provision of accident data is not a panacea for removing incentives for cheating. Reductions in maintenance can occur long before they are reflected in accident rates. A purely informational response to a market failure due to myopia would therefore need to provide information on safety inputs such as maintenance activities, training and the age and condition of capital equipment. These are much more difflcult metrics to measure and to convey to customers than are accident data. For smaller railroads, information on accidents in a given year is unlikely to provide useful information on whether the safety precautions undertaken by that railroad are deteriorating. Accidents are rare events and it my be difflcult to determine from year to year whether the occurrence of an accident is due to myopic behavior or simply due to statistical chance. 

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