Idle wage as a tool to regulate the relationship between ride-hailing platforms and drivers

TL;DR

This paper explores how implementing an idle wage, paid to ride-hailing drivers even when idle, can influence platform welfare and profit, especially under risk aversion and demand fluctuations, proposing a flexible wage policy for optimal outcomes.

Contribution

It introduces a novel idle wage mechanism for ride-hailing drivers, analyzing its effects on welfare and profit under risk aversion and dynamic demand conditions.

Findings

Risk aversion favors idle wage-only payments in a single period.

Large driver pools can make idle wages unprofitable due to excess supply.

Flexible idle wage policies can improve system efficiency over multiple periods.

Abstract

Ride-hailing platforms typically classify drivers as either employees or independent contractors. These classifications tend to emphasize either wage certainty or flexibility, but rarely both. We study an alternative or complementary approach: the \textit{Idle wage,} which provides with a fixed payment drivers even when they are connected without passengers on board. We adapt a well-known economic model of the supply-demand equilibrium in ride-hailing platforms and analyse how the optimal welfare and profit change with the introduction of an idle wage when drivers are risk-averse. We show that in a single-period setting, risk aversion implies that it is optimal to pay the drivers only through an idle wage. However, if the pool of available drivers is large, even a small idle wage could attract too many drivers, rendering the system unprofitable. When the demand fluctuates throughout multiple periods, we show that if the idle wage has to be constant, then it is optimal to combine the idle wage with the traditional payment via trips, so that surge pricing influences the number of drivers connected. This illustrates a relevant trade-off: Risk-aversion favours using the idle wage to attract drivers; however, if the platform is not allowed to fully adjust the idle wage over time, there may be periods in which the idle wage cannot resolve the mismatch between supply and demand. We propose a partially flexible constraint that still makes the idle wage-only solution viable. It allows the idle wage to adapt per period, as long as it fulfills a total minimum wage requirement. Numerical simulations suggest that the idle wage policy, if properly implemented, could be beneficial for the system as a whole.