To:       Group Eight
From:   George Rupp
Re:            Taxicabs

I need your help.  I have been invited to a meeting with Donald Trump, Archbishop Egan, Kofi Annan, NYU, and the Durst and Rudin families.  The subject of the meeting is taxicabs.  We are concerned about the effects the current taxicab situation is having on the real estate we own (which is an awful lot) in New York City.  I’ve attached some recent articles to remind you of what is going on.

            The immediate problem, of course, is the mayhem that taxis are causing on the roads and sidewalks (and sometimes inside the buildings) of New York.  We haven’t lost many people yet in taxicab accidents, and some of them are economists so that that hardly counts, but the high probability of getting mowed down by taxi on Broadway dissuades students and faculty from coming here.  The medical costs of accidents are driving up health benefit premiums, and the damage that out-of-control cabs cause to our storefront properties is appalling.  All the other parties to the meeting are facing similar problems.

            But even though they cause accidents, we don’t want New York to be without taxi service — good, reliable, and reasonably cheap service.  Just think of what would happen at Columbia couldn’t get taxis to the airport and so had to show up in class regularly.  Indirectly all of the parties to this meeting are major consumers of taxi service; our customers and suppliers use taxis a lot to get around town and to the airports.  A rise in the price of taxi service or a deterioration in its reliability will hurt us, too.

            Your reputation as experts on risk-sharing, incentives, and contracts has prompted me to ask for your help in formulating policies for this group to advocate or carry out.

            I need to understand the current situation first.  Why are cabs leased?  Why aren’t cabbies paid wages as they were before 1979?  Or why don’t the people driving the cabs own them?  What are the labor supply effects of the leasing system?  What are the effects on cab usage?  What are the effects on drivers’ incentives to exercise care?  What about drivers’ incentives to maintain the cars well?  How would these change if cabbies were owners, or if they were employees?

            I also need to understand about medallions.  They’re pieces of tin, but they’re selling for hundreds of thousands of dollars.  Columbia has lots of pieces of tin lying around, but they aren’t worth anything like that.  What makes the medallions so valuable?  What determines their value?  Can we make Columbia tin equally valuable?

            What purpose do medallions serve?  Yellow cabs — the cabs that operate in Manhattan below Harlem — have to have medallions, but livery (or car service) cabs — the cabs that operate in the rest of the city — don’t.  (Neither do black cars or limousines.)  Yellow cabs can cruise and pick up street hails, and liveries aren’t supposed to, but it doesn’t seem that medallions are physically necessary for the operation of cabs.

            I’d also like your thoughts on a number of different ideas that have been proposed for this group to talk about.  But feel free to develop other ideas as well.

            First, of course, there are the city initiatives of the last several years — a lot of fines against drivers, a four-year replacement requirement on cars, minima for liability insurance, maybe a bonding requirement.  Who bears the burden of these measures?  Do any of them change the amount of care that drivers exercise?  More important, do they get drivers to exercise the right amount of care?  (Remember that we lose if drivers exercise too little care — people get run over — and we lose of they exercise too much care — our people can’t get around fast enough or they have to pay too much.)

            Then of course there is the libertarian solution — allow anyone to drive a cab and charge any price; in effect scrap the medallions.  What happens to injured pedestrians if there is no liability insurance requirement?  What happens to average reputation for trustworthiness of hail cabs?  Will on-the-spot negotiations produce the right prices?

            (Please don’t pay attention to medallions or their prices.  I have another task force working on the issues surrounding the medallion and its finances.)

            Someone on Archbishop Egan’s staff has suggested the “purple bicycle solution.”  At a time when a large proportion of cab riders can drive, why do we need drivers?  Why not just buy a bunch of pretty old, battered cars, paint them some garish color, and leave them around the city?  If you need to go somewhere, you hop into one of these cars, drive it to your destination, and leave it there for the next person to pick up.  The city government wouldn’t even have to buy cars for this purpose — it could just take abandoned cars, stolen cars, and maybe towed cars.  (In fact, if the city just towed parked cars around randomly, which is a good approximation of current policies, no one could claim ownership and everyone could always find a car to drive.)

            A lot of other, less revolutionary ideas focus on insurance.  One idea would be to ban liability insurance, since it creates a moral hazard problem.  The problem here is bankruptcy and being judgment-proof.  One suggestion is to make the medallion subject to judgments, and restrict liability insurance to amounts in excess of the value of the medallion.

            Other people have said that it should be the drivers who are responsible, rather than the fleet owners.  After all, it is ultimately the drivers who must exercise care or not.  But the bankruptcy issue is even more severe with drivers than it is with owners.  If drivers had to buy insurance, who would pay for it?

            Other suggestions deal with the contract between owners and drivers.  Some people have suggested outlawing leasing and requiring that cabbies either be workers or owners (or maybe sharecroppers).  Would this work, or would the medallion owners find a way of getting around it?  More seriously, would it help in getting the right level of care and output, or would it just result in a lot of cabbies stealing and whole lot less availability of cabs?  If some other form of contract is better than leasing, are there ways of encouraging that form that are not so heavy-handed?

            Finally, a number of the power brokers are concerned about racial discrimination.  Minorities, and African-American men in particular, report great difficulties in hailing yellow cabs.  Is there anything in the current system of medallions and price-setting that encourages this behavior by cabbies?  (Cabbies in an unregulated market will pick up every ride that has positive expected profit; cabbies in a regulated market, to earn the lease payment to maintain the price of a medallion, pick up only rides that earn them the greatest expected profit.)  Does the experience of Washington, D.C. tell us anything useful?  Does the experience of livery cabs, many of whom operate in minority neighborhoods, tell us anything useful?  Would abolishing medallions or lowering the fare (or increasing it outside of Manhattan) help?  Could the power brokers establish a cab company (with or without medallions) that would do better (and still make money)?  Should livery cabs be allowed to cruise in Manhattan?  Whatever your recommendations are, please be sure to describe their effects on this problem.

            I will be meeting with the others in a few weeks.  I’d like you to brief me on what to say.  I’d also like a one- or two-page summary I could bring to this meeting.

            Thanks.