How Much Are Drivers Willing to Pay to Save Travel Time?
How much in terms of monetary equivalence do people value their time? In other words, how much would they spend to save time?
In addition to being the topic of philosophical debates and hypothetical propositions, the answer to this question, or rather the presumed answer thereto, has been used regularly to justify spending billions on highway expansion projects.
The justification goes something like this: Our fellow citizens lose billions or tens of billions of dollars worth of time sitting in traffic.
All these dire estimates hinge on one crucial assumption: What dollar value travelers attach to time savings?
A broadly used rule of thumb is that travelers value their time at something close to half their wage rate. The 50 percent rule is based on statistical inference from studies of traveler behavior (“revealed preference”) and surveys of what people say they would do when confronted with a range of hypothetical situations (“stated preference”). There’s a range of estimates, centered mostly on 50 percent of the wage rate, which is the official standard used by the U.S. Department of Transportation, and works out to about $12.50 per hour (in 2009).
But what’s been lacking is solid, experimental evidence: when people are actually presented with a choice to spend some specific dollar amount to save a few minutes of travel time, do they actually pony up?
However, anecdotal evidence seems to suggest such presumed dollar value is way too high, as this article’s description of a recent study on driver behavior on high occupancy toll (HOT) lanes suggests. To wit:
An important feature of HOT lanes is that they use dynamic pricing: the amount of the toll varies depending on the level of traffic. The system is calibrated to adjust the price every five minutes, and raises (and lowers) the price so that traffic in the HOT lane moves along at at least 45 miles per hour. When there’s light traffic, the toll is low; when traffic is heavier–and the HOT lane offers a faster trip relative to the road’s un-tolled lanes–the toll is higher.
The report draws a couple of key conclusions based on data collected from a million observed trips:
(1) The time savings are only part of the value: It’s not just a quick trip people want, it’s a reduction in uncertainty about when they’ll arrive. If you need to catch a plane, start a meeting, or open your shop at a certain hour, you’ll pay extra for the certainty of arriving on-time. It’s worth noting, for example that many more users pay tolls to use the HOT lanes in the morning–i.e. going to work–than they do in the afternoon–going home; this difference reflects the distinction between reliability as opposed to time savings. Reliability trumps time savings in most toll-payers calculus.
(2) It is estimated that the typical user values travel time savings at about $3 per hour, and reliability improvements at about $23 per hour. This estimate, particularly of the value of travel time savings is much lower than is regularly used in analyzing and justifying transportation investments.
Not only does using too low a value of time mean that DOTs overestimate the economic utility of projects. Worse still, as the article points out, they overestimate the revenue that toll projects produce. Actual toll revenue collected to-date from the subject highway HOT lanes project is testimonial to such gross over-estimation.
If travelers attach so little value on travel time savings, this calls into question the rationale for investing public funds in highway projects. Benefit-cost analyses used to justify highway projects count the estimated travel time savings, often valued at around $15 per hour, as the benefit of the project. If the real value of travel time savings is something like $3 an hour, that reduces the benefits by about 80 percent. So if a project had a benefit cost ratio of 5 to 1 under a $15 value of travel time assumption, it would essentially have no net value if travel time were valued at only $3 per hour.
… the experience with HOT lanes is a kind of natural experiment that tells us how much value people attach to travel time savings. In the case of the HOT lanes, the economic evidence is that the tolling promotes greater efficiency, by giving those who value travel time savings–and actually travel time reliability–the option of paying for and getting a higher level of service. But it also suggests that many investments of scarce public resources in additional unpriced road capacity isn’t economically worthwhile for the travelers who use it.