Mitigating Market Frictions by Monitoring Employees in SMEs: A Field Experiment in Kenya's Public Transport Sector (Stage One)

SMEs in developing countries face a number of market frictions. Negative externalities, heavy regulatory burden but weak enforcement, principal-agent problems between firms and employees due to a lack of monitoring, and poor infrastructure all take a toll on firm productivity. Kenya’s semi-formal public transport sector (PTS) exemplifies how these market frictions result in suboptimal outcomes: it suffers from large costs due to congestion, accidents, and pollution.

The PTS is dominated by small-scale entrepreneurs who own one or a few minibuses called matatus, and employ drivers using high-powered incentives. Their crude incentive structure results in negative externalities such as reckless driving and frequent accidents resulting in casualties and property damage. This project will conduct a field experiment to evaluate the effects of alleviating the limited information problem employers in Kenya’s PTS have with regards to their employee’s driving behaviour. To fill the missing information about driver behaviour, one hundred firms will have one of their matatus fitted with a fleet management system that tracks location, speed, acceleration, and deceleration of vehicles using GPS as part of the experimental design. This will allow for precise measurement of the effect of monitoring on market frictions, firm productivity, compliance with regulations, and contractual agreements between firms and drivers. Additionally, as access to the fleet management platform expires after one year, whether or not firms renew their subscription speaks directly to their willingness to innovate and adopt new technologies.

As governments in many countries have begun mandating GPS tracking in public transport to observe and incentivize employees, it is important to understand the effects of this monitoring technology on driving behaviour. Kenya is an important setting to focus on, as its PTS is dominated by SMEs and the research will illuminate the way SMEs operate in a fragile institutional environment, and how technology affects the market frictions that result from this environment. 


David Schoenholzer

Stockholm University