Taxicab Lease Rate Caps

A basic tenet of economics is that regulating the supply and price of a product or service leads to social inefficiency. The NYC taxicab industry is often cited in economics textbooks as a classic case, in which fixed supply and fare caps produce a windfall to medallion owners at the expense of drivers and the fare-paying public. But less attention has been paid to the policy of imposing caps on the rates charged to drivers who lease the taxicab.[1] Lease rate caps are another instance of price controls designed to redistribute some of the windfall to drivers in order to attract and retain better quality drivers, but may have the adverse effect of reducing the availability of taxicab rides during certain late-night peak hours when taxicabs can be hard to find. If so, the current prospect of service cutbacks in the subway system that will affect late-night riders may be even more severe.

The restriction on the number of medallion taxicabs allowed to operate in NYC was set into law in 1937 when the City Board of Aldermen passed the Haas Act, which capped the number of medallions at 13,595, equal to the number of taxicabs operating on the streets of NYC at that time.[2] The Haas Act was a legislative response to problems in the industry that many believed were associated with open entry and unregulated fares. Over the last decade, the city has auctioned over one thousand additional medallions, but otherwise the number of medallions has remained fixed by city law since 1937.

The merits of restricted entry aside, it is clear that rent-seeking prevails in the NYC taxicab industry. In a May 2008 closed-bid auction of 89 taxicab medallions by the NYC TLC, the average winning bid for 86 corporate wheelchair-accessible medallions was $618,595; for 1 independent wheelchair-accessible medallion $413,000; and for 2 independent alternate fuel medallions, $522,000.[3] The average price of medallions transferred during the years 1968 to 2005 has grown at a compound annual growth rate of approximately 7 percent for individual medallions and approximately 9 percent for corporate medallions.[4] Medallion ownership has become an acceptable, accepted, and attractive entrepreneurial investment.

Meanwhile, the availability of taxicab service in NYC often seems inadequate. The near absence of service in outer boroughs is well-known, though livery cars fill the void.[5] Meanwhile, a report issued by the Design Trust for Public Space notes that “[n]ot only is there a perceived undersupply during peak hours, but taxi service is also oversupplied during off-peak times.”[6] The same report notes: “A frequently heard gripe is the inability to find a taxi when one needs one – on a wet afternoon in Midtown, for example.”[7] Moreover, among 13 measures of service quality, “able to get a taxi when you want one” received the lowest rating on a scale of 1 to 10 in a customer satisfaction study in 2004.[8] Finally, the same customer satisfaction study showed that taxicabs consistently received lower ratings on various measures of service quality (such as safety, comfort, and predictability) than private cars, the subway, car service, and buses.[9]

But an open entry system that would allow more flexible increases in supply when demand is high is unlikely, as the restriction on entry in the industry has a long history and is unlikely to be lifted given the vested interests of medallion owners. How else might the Commission address a potential period of excess demand such as during late-night peak hours when the subway lines are running even less frequently than they already do? One possibility is to remove the cap on lease rates and allow the rates to be determined in a competitive marketplace that is responsive to the forces of supply and demand.

The New York Taxi and Limousine Commission recently held a public hearing on taxicab lease rate caps. The Commission is exploring current leasing trends and practices, including the rate charged to taxicab drivers who lease their taxicabs from a medallion agent. One policy the Commission may want to evaluate is whether to eliminate the caps outright. Economic studies suggest that NYC taxicab drivers engage in a practice called “daily targeting” – i.e. they set an income target and quit when they reach it. If true, it may be that many taxicab drivers quit early on busy nights, reducing the availability of taxicabs when most needed. This is particularly so if lease rates are set too low.

If the caps are set too low, drivers earn more than their competitive hourly wage, and thus hit their income target sooner than they otherwise would, especially during busy shifts. In economic-speak, drivers begin to experience an “income effect” after a certain number of hours of driving and decide to substitute leisure for labor. The Commission currently imposes a ceiling on the rate that can be charged to drivers for leasing a taxicab for a given shift, a practice designed to ensure “equitable” distribution of fares between owners and drivers. However, data indicate that 57 percent of taxicab revenues are allocated to driver earnings, compared to 15 percent allocated to owner income.[10] Meanwhile, the Design Trust for Public Space notes that “[n]ot only is there a perceived undersupply during peak hours, but taxi service is also oversupplied during off-peak times.”[11] This raises the question of whether lease rates are lower during peak shifts than they would be in a competitive marketplace.

Of course, lease caps may allow drivers to call it quits before they become fatigued, irritable, or otherwise prone to less efficient operation, which includes the higher probability of getting into an accident or engaging in traffic violations. Moreover, drivers may take fewer risks than they would if lease rates were higher and were compelled to earn a higher rate of revenue per hour in order to quit early. However, these factors also affect behavior during less busy days when they are compelled to work more hours to meet their target, and it is not clear from currently available data that drivers get into more accidents, receive more summonses, or incur other penalties for traffic infractions during the tail end of their shift than during the earlier part of their shift. Drivers apparently still work more hours to meet their target, which suggests that drivers are more interested in hitting their target than evaluating the effect of more hours on the quality of their driving.[12]

There is some available evidence to suggest that lease rates could be set higher in high demand periods such that the availability of taxicab rides would increase at certain hours when demand is expected to remain high. Trip sheet data analyzed by the Design Trust for Public Space indicate that taxicabs spend approximately 35 percent of their time “cruising” (i.e. without a passenger) during the hour of 1 a.m. to 2 a.m., and that the average cruising distance during this hour is approximately 2 miles. These figures rank among the lowest compared to other hours throughout the day, surpassed only by the hours of 11 a.m. to noon, 2 p.m. to 3 p.m., and 8 p.m. to 9 p.m. for percent of cruising time, and by the hours of 11 a.m. to noon, noon to 1 p.m., 8 p.m. to 9 p.m., and 10 p.m. to 11 p.m. for cruising distance.[13] Is it possible that high utilization late at night reflects not only high demand but also reduced supply because some drivers have already hit their income target and called it quits?

If yes, the solution is not to categorically argue for higher lease rates. Rather, it is to observe that the open marketplace is a more efficient, flexible way than regulation to set lease rates, particularly given the competitive structure of the taxicab industry. Even though entry is restricted in the NYC taxicab industry, there is little concentration of medallion ownership and management throughout the industry. Not only do drivers have the option of working as livery drivers, limousine drivers, or drivers of other alternative transport vehicles, they also have the option of leasing taxicabs from over 70 agents that serve as fleets or lease managers, none of which owns or manages more than a 7 percent share of the total number of medallions, or 11 percent share of the total number of medallions owned or managed collectively by fleets or agents. The agent with the highest share of medallions owns/manages approximately 7 percent of the total number of medallions. [14] In other words, drivers have options. Save collusion among owners, they would not accept lease rates that would reduce their wages below their competitive level.

This does not mean owners and agents have no bargaining chips at their disposal. There are more than three times as many drivers in the city as there are medallion taxicabs, and unions have ceased to exist in the industry. In 2005, there were approximately 42,900 licensed taxi drivers eligible to drive the 12,779 taxicabs licensed at the time,[15] and this proportion has not changed much in three years.[16] But given that corporate medallion taxicabs are double-shifted,[17] and that approximately 40 percent of owner-drivers lease their taxicabs for a second shift (in 2005),[18] the industry needs many more than 13,000 licensed drivers simply to have a sufficient number of drivers for the current number of taxicabs in operation. Even with the remaining surplus of drivers, however, one can still observe “drivers wanted” signs posted on taxicabs operating on city streets. Given these conditions, as well as the competitive nature of the market for lease contracts, the removal of caps on lease rates may be a more realistic, incremental approach to increasing the availability of taxicab rides during certain peak hours of high demand shifts.

Of course, drivers who lease by the shift cannot work more than 12 hours per shift. The average shift is approximately 10 hours, and it has been estimated that lease drivers work approximately 15 percent more, in terms of mileage and revenue, than did commission drivers in the early 1980s. Thus, many drivers already work a large portion of their 12-hour shift. In short, any expected effect of increased lease rates on the availability of taxicab rides would be incremental. But the point is to allow competition in the marketplace to decide whether increases in lease rates are warranted as a way to bring driver wages in line with a competitive level and thus create an incentive for drivers to work an additional half-hour or hour when demand is sufficiently high and an extra trip or two is deemed necessary to hit an income target.[19] With cuts in subway service looming, late-night riders may be appreciative.

[1] Although industry analysts Bruce Schaller and Gorman Gilbert have discussed the topic of leasing, I am unaware of any study in the economics literature of leasing in general, or price controls in the leasing market in particular.
[2] Bruce Schaller, “New York City 2006 Taxicab Fact Book,” Schaller Consulting, March 2006, p. 22.
[3] Data are from NYC TLC website at http://www.nyc.gov/html/tlc/medallion/html/home/home.shtml. Bid prices quoted are based on “tentative” results (pending confirmation) as reported in the data on the website. See also http://www.nyc.gov/html/tlc/html/about/column06_2008.shtml, and the press release issued on the website: http://www.nyc.gov/html/tlc/downloads/pdf/press_release_medallion_auction.pdf.
[4] Data are from Bruce Schaller, “2006 New York City Taxicab Fact Book,” Schaller Consulting, March 2006, p. 41.
[5] According to data analyzed by the Design Trust for Public Space, “85 percent of yellow-cab trips originate in Manhattan and 86 percent have Manhattan destinations.” Design Trust for Public Space, Taxi 07: Roads Forward Report, p. 118.

[6] Design Trust for Public Space, Taxi 07: Roads Forward Report, p. 126.
[7] Design Trust for Public Space, Taxi 07: Roads Forward Report, p. 116.
[8] Bruce Schaller, “New York City 2006 Taxicab Fact Book,” Schaller Consulting, March 2006, p. 11.
[9] Bruce Schaller, “New York City 2006 Taxicab Fact Book,” Schaller Consulting, March 2006, p. 12. Taxicabs received a higher rating than buses for predictability.
[10] Bruce Schaller, “2006 New York City Taxicab Fact Book,” Schaller Consulting, March 2006, p. 35.
[11] Design Trust for Public Space, Taxi 07: Roads Forward Report, p. 126.
[12] If drivers do indeed get into more accidents, receive more summonses, or incur other penalties for traffic infractions during the tail end of their shift than during the earlier part of their shift, then it may be that lower lease rates during high demand periods make drivers more efficient in high demand periods than in low demand periods. If drivers hit their income target earlier, they stop working before they become fatigued and more prone to accidents. In this case, alternative ideas for increasing availability during these hours could be considered.
[13] “Design Trust fellows analyzed electronic trip-sheet data for over 5,000 medallion taxi trips, 3,700 of which included specific origin and destination data. These trips were provided by at least four different yellow cabs over the six-month period of July to December 2005.” Design Trust for Public Space, Taxi 07: Roads Forward Report, p. 116.

[14] Data are from NYC TLC website at http://www.nyc.gov/html/tlc/html/current/current_licensees.shtml. There are a total of 13,231 medallion licenses in NYC according to the data; 113 of these licenses are associated with “medallion standby vehicles,” which leaves 13,118 taxicabs currently operating on the streets of NYC. The data identify the name of the licensee, i.e. owner of the medallion, and include another field that identifies the “agent.” Medallion agents function as fleets or lease managers operating out of a garage or some other location out of which medallions/taxicabs are leased. Another dataset matches the agent number to the name of the agent, which permits the calculation of medallion shares for each agent by name. Two agent numbers – “000” and “999” – are not associated with any agent names and are assumed to apply to individual owner-operators or otherwise, meaning that agent management is not utilized by the licensee (20 medallions are not associated with any medallion agent number, but are included among the agent data). All medallion types – individual, mini-fleet, wheelchair-accessible, etc. – are included. Medallion shares are calculated based on the total number of taxicabs (i.e. 13,231). See also the TLC 2007 Annual Report, p. 9 at http://www.nyc.gov/html/tlc/downloads/pdf/annual_report_2007.pdf.
[15] Bruce Schaller, “New York City 2006 Taxicab Fact Book,” Schaller Consulting, March 2006, p. 51.
[16] As of March 2009, there were 13,231 medallion taxicabs and more than 40,000 drivers. Discussion with Adrian Gonzalez at NYC TLC. See also NYC TLC data from NYC TLC website at http://www.nyc.gov/html/tlc/html/current/current_licensees.shtml.
[17] Design Trust for Public Space, Taxi 07 Roads Forward Report, p. 126.
[18] Bruce Schaller, “New York City 2006 Taxicab Fact Book,” Schaller Consulting, March 2006, p. 32.
[19] The analysis does not apply exclusively to shift drivers. Presumably, weekly lease rates also affect driver income targets. Drivers may divide the weekly rate by the number of days worked, thereby setting a daily income target based on the effective daily lease rate they pay.