Ride-sharing has mushroomed since Uber was formed in 2009, with Uber alone offering around 5.4 million drivers and couriers globally. The growth has meant that ridesharing is a pretty ubiquitous presence in most cities around the world. A recent study from Stanford explores whether these new services are actually good for us, however.
The author finds that car loans play a key role in determining how the benefits of ride-sharing are distributed to drivers. What’s more, the availability of finance has been a key ingredient in the growth of the sector.
Provision of capital
The gig economy is unlike other sectors as the platforms don’t own any assets themselves or provide participants with the capital they require to operate. Uber doesn’t provide drivers with vehicles, for instance, but instead rents the time of people providing their own equipment.
This has obvious benefits for the platforms who don’t need to invest in physical assets as the onus is on the drivers instead to make such investments. While many previous studies have shown that driving for companies like Uber can be a precarious way to earn a living, the capital requirements do nonetheless mean that many will be priced out of doing so.
The author examines what impact Uber and Lyft have on car buying (and borrowing) in the cities they operate in. They gathered data on car purchases from car loan firms, as well as official records on vehicle registrations across four states and data from the ride-sharing firms themselves.
Driver requirements
This allowed for an analysis of the financial impact ride-sharing had at a very granular level. For instance, it emerged that both Uber and Lyft require cars to have four doors, which meant that when the platforms arrived in a city, there were more four-door cars bought. What’s more, there was a particular increase in purchases in low-income neighborhoods, and those cars tended to drive much more than usual.
As a result of this, the arrival of Uber et al coincided with an increase in car loans being given to low-income people who had poorer credit ratings. This was a trend observed in city after city, with demand for cars increasing among people who can scarcely afford to pay for them.
It was a sign of a market emerging to satisfy the fresh demand. The author notes, however, that while loans were given to people with poorer credit ratings, this didn’t coincide with a rise in delinquency rates, which does, at least, suggest that the loans were somewhat affordable.
What then?
So, the arrival of Uber increased the supply of financing to drivers, but what then? The researcher created a model whereby car finance was prohibitively expensive to see what happened. It resulted in the number of drivers falling by around 40%, with journey costs for passengers doubling.
It’s a scenario in which most of the drivers who were reliant on car loans were forced out of the market, and while the higher prices might encourage those who don’t need finance into the sector, this wasn’t enough to offset the supply of poorer drivers. In essence, the unavailability of finance would have put a huge roadblock in the way of Uber’s chances of scaling.
The researcher then quizzed whether the various models of car ownership impact who tends to benefit from ride-sharing. For instance, if lower-income drivers rented cars rather than purchase them, this still allowed more drivers into the market, which meant lower prices for consumers, but the prices were still higher than if drivers owned their vehicles.
These findings suggest that it’s important to help low-income drivers get access to cars and car loans to keep the balance that lets ride-sharing apps grow fast. Gig drivers make more money, but they also have to deal with extra wear and tear on their cars.
The author doesn’t give a personal opinion, but points out that ride-sharing companies really count on people with lower incomes being able to afford cars.
“People haven’t realized how important it is for the worker to supply capital for these businesses to work,” he concludes. “The fact that the worker owns the car instead of a company owning the car actually does make a big difference.”
