Cheating When in The Hole: The Case of New York City Taxis

Fraud occurs when there is an incentive and the opportunity to commit fraud and the fraudster can rationalize his behavior. Academic literature in financial economics has investigated incentives and opportunities to commit fraud but has largely ignored the fraudsters’ ability to rationalize fraud. We address this gap by positing that economic actors, whose earnings are restricted by regulations, cheat more and rationalize such behavior as an effort to get “out of the hole” that regulations have forced them into. In a sample drawn from 200 million New York City (NYC) taxi rides for 2013, we find that taxi drivers are unlikely to overcharge (0.5% likelihood) customers when dropping them off in areas in which NYC taxis are legally able to collect another passenger, but are very likely to overcharge passengers (80%-90% likelihood) when dropping passengers off in areas in which NYC taxis are not allowed to pick up another customer. We interpret these findings as evidence that regulatory restrictions on earnings can prompt economic actors to view themselves as “in the hole,” which leads to (much) higher levels of cheating and fraud.