The Story
In a long-running tourist scam, dozens of New York City cab drivers routinely overcharged passengers, with many others doing so on occasion, the Manhattan District Attorney announced last week.
The Manhattan DA told the Wall Street Journal that 45 drivers face felony charges for the fraud, which entailed doubling the rate charged to passengers by setting the meters to "Rate 4," which shows that a trip was outside the city limits of New York's five boroughs (when in fact it was within city limits, as for trips between Grand Central Terminal and one of the airports). Though the DA pressed charges against what he believes are the biggest offenders, the city's Taxi and Limousine Commission (winsomely abbreviated TLC) has alleged that over 35,000 cab drivers engaged in the fraud at least once. The fraudulent charges, according to the TLC, amount to more than $8.3 million.
The Back Story
Though the fraud charges may seem shocking, the situation is understandable because cab drivers have both incentives and opportunity to cheat. Specifically:
* NYC cabdrivers earn money in proportion to how much they charge.
* Rate 4 is not just a little higher than than the standard rate—it's twice as high.
* Cabbies typically know more (about the city, about prices, and about how the meters work) than do tourists, an instance of information asymmetry between seller and buyer.
* Cabbies rarely see the same passengers more than once, especially if those passengers are tourists, so the drivers needn't fear losing future business because of a reputation for high prices. Although they know that a passenger might file an official complaint, they also know that this is unlikely.
But even though it's tempting for individual drivers to cheat, such cheating erodes trust in the taxi system as a whole. That, in turn, can deterism, exacerbate traffic, and create other problems for the city . So the TLC has an interest in fixing the problem. (As TLC chairman David Yassky put it in the Journal article, "The entire taxi system, which is a jewel of the city…depends upon trust," adding, "We are determined to protect the integrity of the taxi.") To that end, the TLC has already retrofitted the meters so that when a driver flips the switch to the higher rate a passengers hears a beep and a message about the re-setting.
Enlisting passengers in detecting fraud is a good idea, and it's almost certainly cheaper than centralized surveillance (like the sting operation that nabbed the perpetrators). But it's not clear whether the retrofitted meters are enough to prevent fraud (or to curb enough of it to justify the cost of the upgrade). We can imagine that an enterprising cabbie might tamper with the alert or just drown out the message with a loud radio, especially if a customer isn't paying attention.
What Is to Be Done
A simper and cheaper solution might be a printed message, perhaps on the TV monitor already in the back of NYC cabs. The message can be static—rather than responding to the cab's current GPS location, it can simply direct passengers to a Web site accessible by smartphone, where they can find an estimated fare between any two points in the NYC area. (At least one such site already exists, but it's not currently mentioned within NYC cabs themselves.) Given the prevalence of smartphones, every taxi driver will think twice before resetting to Rate 4.
The bottom line: to stop any kind of fraud, the expected cost of being found out (that is, the size of the penalty times the chance of a penalty) should outweigh the benefits of trying to cheat. In this sense, taxi fraud is no different. An effective strategy must make detection and enforcement prevalent enough, cheap enough, and not easily gamed with new shenanigans.
Copyright Kay-Yut Chen and Marina Krakovsky, http://www.secretsofthemoneylab.com
Chen and Krakovsky are co-authors of Secrets of the Moneylab: How Behavioral Economics Can Improve Your Business (Portfolio/Penguin, 2010).
