Abstract
Assuming that both road safety and travel time are a function of traffic density and care from a driver’s standpoint, a theoretical framework is developed. First, an expected-utility framework is developed to study the optimal choice of care by a rational driver. Second, the subjective value of traffic density is derived as a measure of drivers’ willingness to pay for simultaneous road safety improvements and travel time savings. Third, the above results are revisited when car insurance is available. Fourth, a simple cost-benefit analysis rule of road capacity expansion is derived when moral hazard is present.
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