Free Cabs, Free Tuition, and the Power of Deregulation


Yesterday’s NY Times featured an article about a NY cabbie who offers free rides and apparently cleans up on the generous tips. This reminded me of an experiment conducted by NYU Law a couple years back. A cohort of students were admitted for zero tuition with the hope that they would give more generously as alumni (taking advantage of the federal government’s tax deduction subsidy.) This left me wondering: when does this strategy of giving away a product or service ultimately prodcue greater revenue? And relatedly, are there other situations where deregulating behavior – i.e., eliminating a requirement that people behave in some way – might lead to more “good” behavior (defined in the same way as regulators might) on the part of these people.

When does giving away a product produce greater revenue? In the case of the cabbie, I think that people are tipping him beyond the normal fare for a few reasons. First, passengers probably love the choice to pay what they want. They also appreciate the trust he puts in them by allowing them to define the fee. Finally, they probably enjoy the novelty of a free cab ride. My guess is that giving away a product works particularly well where there is a one-on-one relationship between provider and consumer. But perhaps most importantly, the cost of a cab is generally known (most locals probably have an idea of what a meter fare would have been), and that cost is often BELOW actual market value. I can think of many situations – rush hour, rain, etc – in which most cabs could double their fares and still stay full.

The law school give-away offers students one more benefit (beyond choice, trust, and novelty): time. Students have limited income and NYU’s program offered students a chance to pay NYU after the six-figure incomes kicked in. But I wonder if the law school experiment is paying off? I think people over-tip the cabbie because they appreciate what he is doing for them, personally. And in the law school context, we’re not talking about dropping $20 unnecessarily; it takes serious commitment to get an alum to donate $100K (plus interest). Of course, it helps that Uncle Samuel will subsidize that gift.

What about deregulation? Brown University has no academic distribution requirements. My mother-in-law (with a BA and PhD from ivy-competitor Penn) insists that academic deregulation is irresponsible because students can choose a very narrow curriculum. On the other hand, perhaps students – appreciative of the choice – actually take a wider assortment of classes than they would if there was a particular set requirement. Like the NYU example, this is a testable hypothesis.

This brings me to criminal law. Might the decriminalization of certain acts result in them occuring less frequently? Thiis would probably occur when people commit crimes to punish society for, or to protest, the very act of criminalization. Thus, I can imagine a person with no interest in flag burning choosing to do so to protest a flag burning ban. (I kinda picture Eugene Volokh as just that sort of guy.) Of course, many of these regualtions might be unconstitutional anyway.

Another example might be theft. Can a store reduce theft by announcing “although we don’t prosecute shoplifters, please don’t steal”? It seems possible, but doubtful. How about a music company that says “we don’t forbid free file sharing, but we’d really appreciate it if you’d buy our music instead?” I imagine someone, somewhere, is testing that very approach.

My suspicion is that, on balance, regulation is excellent at assuring distribution. If you want to make sure that the largest number of people behave in a particular way, regulate. But if you’re worried more about aggregate positive effects – increasing total revenue, encouraging students to take rich and varied coureloads, and perhaps convincing the queasier file-sharers to spend some dough – maybe deregulation or freebies are worth considering.

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2 Responses

  1. NYU alum says:

    Of course, the NYU example is not entirely on point because the full-tuition scholarships have multiple other purposes. Their biggest purpose is to entice top prospects who might otherwise go to Harvard and Yale, and on this front I know anecdotally that they have succeeded quite well. NYU also has a number of full-tuition scholarships reserved for students committed to doing public interest work, and NYU must undersand that those students, if they follow through on their commitments, will be unlikely to turn into big-dollar donors. The purposes of the latter scholarships are altruistic, to enliven and diversify the student body, and I suppose the hope that some of those alums will go on to be important figures in the law and reflect well on their alma mater in that way.

    So the analysis can’t just look at the dollar return in alumni giving.

  2. Lokon says:

    I have always been interested in how offering free content could work profitably. Though I always applied this to works of art and the like using the creative commons liscence. These other models, are fascinating. I wonder if it will pay off for NYU.