Chicago Booth Review Podcast Should Billionaires Pay Higher Fines?

Jean-Pierre Dubé: For some paying a $25 fine for speeding would be literally a slap on the fingers at best. But for somebody living below the poverty line, a $50 fine could be catastrophic. It could cost them calories.

Hal Weitzman: If a billionaire and a minimum wage worker are both independently caught driving above the speed limit, should they pay the same fine or should it be adjusted to their wealth? In some countries, fines change according to income, but so far US cities have been reluctant to try it out. Are they leaving money on the table? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. In 2021, Jean-Pierre Dubé wrote an award-winning essay for Chicago Booth Review entitled Lower Fines Could Lead to Higher Revenues. Dubé, a Booth marketing professor and pricing expert points out that standardized fees are aggressive, hurting the poorest most, causing delinquency and often exacerbating their situation. He also notes that uniform fines don't act as a deterrent for the wealthy. And he says that personalizing fines could bring in more money for cities at a time where they're increasingly depending on revenue from fees to balance their budgets. So why are US cities so reluctant to do it? Jean-Pierre Dubé, welcome to the Chicago Booth Review Podcast.

Jean-Pierre Dubé: Thank you very much.

Hal Weitzman: We are delighted to have you on because we wanted to follow up several years after you wrote this terrific award-winning piece for us entitled Lower Fines Could Lead to Higher Revenues. About the benefits of personalized fines and how they would help cities and taxpayers. So just remind us, for those of us who haven't read the article for a while, what's wrong with the current system? What's wrong with charging people the same cost, same price for a fine?

Jean-Pierre Dubé: Sure. Well, it really gets to the heart of how we think of what's fair. I think that the working logic by most is that a fair pricing scheme would be one where everyone gets charged exactly the same amount, whether that's for a service or a benefit, or in this case a penalty for something you're not supposed to do. But what we forget is that sometimes when we charge one single uniform price for all, that may exclude certain parts of the population from being able to pay. In the case of goods and services, that may deprive some people from getting served the benefits of those services. In the case of city penalties for some paying a $25 fine for speeding would be literally a slap on the fingers at best. In fact, in some cases, if your income is really high, it might almost feel like a right, just paying for the right to speed.

But for somebody living below the poverty line, paycheck to paycheck, a $25 fine or a $50 fine could be catastrophic. It could cost them calories.

Hal Weitzman: And I know you've got some data that you can share with about the real effects of those fines and delinquent fines that lead to fees and everything else. Tell us a little bit about that.

Jean-Pierre Dubé: Well, it's sort of another factor to think about here is that the city of Chicago, just for instance, has been struggling for decades with its municipal debt, its municipal shortfall. And one of the seemingly easiest ways to raise more money in the short term is, well, let's just raise prices. There's sort of this view that pricing increases are a free option. And so we've seen over the last decade or more lots of examples of how the city just sort of raised prices without any kind of evidence that this would genuinely increase revenues. The thinking is, if I raise everything from speeding tickets to penalties for unpaid vehicle registrations and so forth, unpaid parking tickets, that the combination of the amount for the fine and the amounts charged for penalties when those fines aren't paid, if everyone complies with that then you make more money. That's the way the city thinks of revenue. Of course, in economics and in real world business, the word revenue means money coming back. It doesn't mean aspirational and the law of demand prevails that as you-

Hal Weitzman: So you're saying that there's a proportion of people who will not pay the cost of the fine, so there's some proportion of the revenue that will never come in.

Jean-Pierre Dubé: Absolutely. If you raise the price of a speeding ticket, it's just going to put more people at a disadvantage and it's going to increase municipal debt as there going to be unpaid fines. That's exactly what we saw in the last 10 years. Just as a, for example, one of the many prices Rahm Emanuel raised-

Hal Weitzman: And that's Rahm Emmanuel was the former mayor of Chicago, two mayors ago.

Jean-Pierre Dubé: Two mayors ago, former Mayor Rahm Emanuel felt that he could generate $16 million in incremental revenues per year just by increasing the penalty for not paying your vehicle registration fee from 120 to $200. But this of course, this projection relies on the assumption that everyone will keep paying. That it would not be possible for someone to continue driving their car and simply just not pay for their vehicle registration. And of course, that's not at all what happened. We saw an increase in violations. In fact, just as an example, in 2017, 10,000 people who filed chapter 13 personal bankruptcy in the city of Chicago, cited unpaid city tickets, parking tickets and these other kinds of fines. Only 1000 people filing chapter 13 bankruptcy in 2007 cited tickets. So you can see before and after these price increases, not only was there by the way, an increase in personal bankruptcies. But the proportion of those where tickets were paying a non-trivial role, went up dramatically.

Hal Weitzman: You're actually saying that tickets can be one of the contributory factors to bankruptcy?

Jean-Pierre Dubé: Oh, absolutely. For a low-income household, failure to pay a ticket can land you a whole bunch of additional penalties over the next few months. They can sometimes more than double the amount of the original fine. So somebody who's delinquent for a couple of years, you might lose your driver's license which means now you can't go to work, you lose your job. And there was a study that showed that unemployment rates went up in a statistic significant way in Chicago before versus after the increases in these fines in those areas where you saw higher rates of delinquency. Eventually you can actually go to court and sometimes you could face short-term incarceration. You could go to jail for four or five days due to unpaid fines and fees.

For whatever it's worth, in 2019, Chicago traffic fines which when unpaid tend to go to collection agencies, 90% of the unpaid fees or fines, accounts that were sent to a collection agency, were concentrated in 20 zip codes in the Chicago area, which are predominantly populated by Black Americans and Hispanics. So this is also a very serious social injustice problem that not charging differentially and subjecting everyone not only to a uniform rate, but to a uniform rate that keeps going up year over year for no logical reason is disproportionately hurting those who are already economically and sociologically disadvantaged.

Hal Weitzman: So not only is it bad accounting because the city of Chicago is calling it revenue when it's actually not revenue at all, some of it isn't. But it's also hurting the people who you might think a system that was designed to be fair would benefit from.

Jean-Pierre Dubé: Yes. Pretty ironic when you consider Rahm Emanuel's positioning as wanting to pursue social justice. Lori Lightfoot, for example.

Hal Weitzman: She was the successor to Rahm Emanuel.

Jean-Pierre Dubé: Successor to Rahm Emanuel lowered the bar for speeding cameras, so that whereas previously you got a $35 fine for being 10 miles an hour over the limit, she lowered it to six to nine miles per hour for that $35 threshold. Again, the thinking being, hey, free money for the city. And when we look at the people who are disproportionately getting taxed with amounts they can't afford to pay, it tends to be in disadvantaged neighborhoods.

Hal Weitzman: So on the one hand you have a succession of mayors who've come in saying they want a more equitable city. On the other hand, you have increasing fees which are more and more inequitable in how they affect people. So this is so interesting because personalized fines, I guess one of the reactions that gut reactions that many of us would have is that just seems unfair. Why should I pay more than my neighbor because I earn more or whatever? But the effect is really the opposite, that if you wanted an equitable treatment, you would charge people different fines.

Jean-Pierre Dubé: Absolutely. I think if we had somebody from the city finance with us, they would immediately remind us of a very important detail. And that is you're not supposed to speed, you are supposed to have a vehicle registration fee. And that the purpose of these fines is to deter people from not complying with the law. And I don't think at any point are we in disagreement that we don't want people to feel that because they're financially needy, they shouldn't comply with the law. Your income shouldn't be a factor in whether or not you have to obey the law. But the point is what's a deterrent for somebody who's making $500,000 a year? A $25 fine is not really a deterrent. But for somebody who makes $15,000 a year, a $25 fine actually could be excessive.

Hal Weitzman: Okay. So I know in some European countries I've experimented with, very, very high fines for the uber wealthy. And certainly we have some uber wealthy people in Chicago, and I'm sure on occasion they speed. How would a system work in the US? Would it be up to cities just to draw the line on income and then say, above this level if you speed above this speed, then this is the fine. And how high do you think they could go?

Jean-Pierre Dubé: Well, that would be one way to do it. And what you're suggesting is a genuinely progressive fine scheme which is based on your income. That's what they do in Switzerland. So in Switzerland, the amount that you pay for a speeding ticket is proportional to your income. So there's a famous story in 2010, a Ferrari Testarossa got caught doing 137 kilometers per hour in St. Gallen where there was an 80 kilometer per hour limit. And the driver was charged a penalty of 290,000 US dollars. So again, we're talking about somebody who is extremely wealthy, $290,000 got a hurt even in that case. But again, this was newsworthy because of the magnitude. But somebody who's earning 15,000 a year would pay a dramatically smaller amount. And again, the idea is we want somebody who's going way over the speed limit, we want them to be deterred from that kind of speeding. But clearly the amount of money that becomes an effective deterrent versus the amount of money where it becomes excessive and cruel and unusually punishment, is going to vary with your ability to pay.

Hal Weitzman: So at the lower end, would it be that people didn't get to fine at all or they had a nominal fine?

Jean-Pierre Dubé: I guess for the average person you would call this a nominal fine. But again, the word nominal is all re.lative

Hal Weitzman: Sure. But you're talking like in other words, there could be people who are fined a few dollars and there could be people who are fine.

Jean-Pierre Dubé: Yeah, or people who are charged $10,000.

Hal Weitzman: Okay, so the idea then is that this could be more equitable. Could it also raise more money for cities? Because that was kind of the point of your piece.

Jean-Pierre Dubé: Absolutely. Well, now we're getting to the heart of the economics. The missing ingredient in city logic is the law of demand. And we know from countless papers, countless articles and countless field studies of the business world at least that there's a demand curve. And that payers are more likely to pay, they're more likely to buy as prices go down, they're less likely to buy as prices go up. And the same basic economic logic is going to hold when it comes to fines. That at some point your ability to pay is going to be at stake as mayors like former Mayor Emanuel or former Mayor Lightfoot just indiscriminately raise the uniform price. And that's exactly what we observed. To put it in economic terms, there's elasticity in a person's propensity to pay.

And as the price goes up, I eventually either can't pay or I just say, this is so much money I'm not going to pay it. I just refuse. It's going to cannibalize other things I do. And even though it's against the law and I'm supposed to pay, I'm just not going to pay.

Hal Weitzman: But your idea is that delinquency, the number of people who are not paying their fines would go down if we had a more graduated system like we discussed.

Jean-Pierre Dubé: That's exactly right. And since we've already seen that as fine rates go up and down across cities, that propensity to pay goes up and down, compliance with payment goes up and down. We already know that elasticity exists anyhow, but what economics would say is, well, if I'm trying to get people to pay the right amounts and some people are going to stop paying at lower prices than others, personalizing is a way of fine-tuning everybody's payment propensity. And it's true, somebody at the low end of the scale might be charged only a nominal amount. But if I collect $10 from somebody, that's more actual revenue than if I fined them $50 and collect zero.

Hal Weitzman: Right. Particularly if they'll pay $10 without lots of reminders and core action and everything else that costs money.

Jean-Pierre Dubé: No. And now you're really getting to the key of this point, which is we're not even thinking about all of the costs to the city of court dates, fines, reminders, petitions. When somebody goes to court to petition forgiveness on their fine based on their means, this requires scheduling a court date. It requires a judge to deliberate on, this is extremely costly to the city. And meanwhile it's just more time elapsing where rather than collecting money, the city's actually expending resources to provide all of that infrastructure to petition and rethink the fine. The irony of all of this by the way, is at the end of the day we do have personalized fines in the city of Chicago. But it can require months or even a year, and each individual going in front of a judge and letting the judge use their gut instinct to make a determination of whether to forgive the fine and how much to forgive.

Now, that's not called personalization because you were technically charged the full rack rate and ex post, you might be eligible to get some forgiveness. When I talk about personalized fines, my point is why not use data and do this from the get go? Why not just charge the right prices up front, save the city a fortune in administrating all of the unpaid debt and meanwhile we collect the money.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out, it's called Not Another Politics Podcast. Not Another Politics podcast provides a fresh perspective on the biggest political stories, not through opinions and anecdotes, but through rigorous scholarship, massive data sets and a deep knowledge of theory. If you want to understand the political science behind the political headlines, then listen to Not Another Politics podcast, part of the University of Chicago Podcast Network.

So when you wrote that piece for us, JP, you said in it you were looking for a city to experiment with because you need the data to construct these models of what fines are effective. And I know there's a big psychological barrier in cities saying, yes, we'll do it. Yes, we'll experiment. Did you find a city to experiment with?

Jean-Pierre Dubé: We did, but it took several years partially because of the chicken and egg problem that most cities said they're interested in doing something like this, but first they want to see proof that it works. And so of course if nobody city wants to be the lead city, then we're never going to find anyone who's willing to do it. It almost seems like if one city does it and it works, then it's going to literally open the floodgates. That's my prediction. There are some other psychological barriers here. But that one's just the perceived risk, is there's just some cities that have been unpersuadable because for them the definition of revenue is the projections they put on their books, which are based on an assumption that a 100% of people will pay what they're charged.

And the reality where you have hundreds of millions of unpaid debt is not considered. For them that's not the right benchmark against which to work. So if I personalize prices, I'm going to be charging some people less, for them that's less revenue. Of course, if we use the correct definition of revenue, it can be more revenue because somebody paying a smaller amount is better than somebody not paying anything on a higher amount.

Hal Weitzman: Well, even if they model people paying $10,000 fines?

Jean-Pierre Dubé: Well, sometimes I'm perhaps not the best negotiator with the city, which is why someone else is handling most of those meetings. But I once made that joke flippantly, and that was a city I haven't been very successful at partnering with but that's exactly what I said.

Hal Weitzman: So there's an accounting problem, and then there's a kind of psychological problem which is you first. I'm just wondering if there's still the fairness issue.

Jean-Pierre Dubé: Well, that's a slightly different thing, although I think we've worked over the fairness thing. Technically speaking, it's against the law in the United States to charge people different fine amounts. But that's actually not so far removed from the management of a supermarket chain telling you, "Yeah, consumers would find it hopelessly unfair if we charged everyone different prices." But when we're talking about the fairness issue, that's about the actual ticket price, the sticker price. What seems to be lot more fair is a world where you charge everyone the same price, and then ex post people get coupons. And the who gets a coupon and the face value of the coupon is then determined based on data of some sort, that's considered more fair.

Hal Weitzman: But that would certainly be a deterrent if you got a $10,000 fine, even if you got a $9,900 coupon, it would still be presumably a significant deterrent. So tell us a little bit as much as you're able to. I know you don't want to share the name of the city that you're working with, but tell us about where you are going to experiment and hopefully the floodgates will open.

Jean-Pierre Dubé: Well, we're very hopeful. We're literally on the verge, meaning we're a month away now from launching our experiment. We're working with a water utility in a large western city in the United States. The plan is to take about 20,000 households in this large city. And for the course of three months, which is since many people have quarterly billing for their water is approximately a payment cycle, the 20,000 households are each going to receive randomized coupons. And what that means is over that three month period, the household will obtain X percent off of the regular price for their water. So there's a uniform price per cubic foot of water. And depending on the coupon you get, you'll get some percentage discount off that regular price for that three month period. And we'll have a control group of households who will get 0% off and we'll continue to pay the full price.

Hal Weitzman: And so in that case, would you be putting the price of the cost of water up the standard price?

Jean-Pierre Dubé: So we are not. Actually, it's interesting you asked that question because even with businesses I've had a very hard time persuading many businesses to test higher prices. Testing lower prices with coupons, fine, but higher prices they're not so much of a willingness. But what's been happening now, we're a couple of years out of COVID and lockdown, many cities are in the process of raising the regular prices of water now. And so this will coincide with a fairly substantial increase in the regular price of water, which will give us a little more information then. So we're going to be starting with a higher base price, and then people will get discounts off of that higher base price.

Hal Weitzman: So some won't get any discount, some will get hefty discount. That's based on where they live?

Jean-Pierre Dubé: It's going to be randomized.

Hal Weitzman: Oh, you randomize. Okay.

Jean-Pierre Dubé: Yeah, this is a real experiment because this is the problem. We're trying to learn what kind of household features are predictive of who can pay and who can't pay. And naturally income would be one thing, but there are other socio-demographic factors, not to mention your payment history. And we're going to try and see if we can use the same kind of information that would be available to a judge granted many months later, for somebody who's already hopelessly delinquent and racked up a ton of debt. We're going to try and see if [inaudible 00:20:57] using the same kind of information as might be available to a judge eventually, if we can build an objective platform that will decide what amount of the price might be forgiven. And incidentally, unlike a human being, even a qualified expert judge the software will be consistent. There's no changes in opinion or hidden biases, it will always use the same rules.

Hal Weitzman: Okay. So the way you're talking about coupons and having standardized prices is going to remind a lot of people of shopping. And we had some piece in CBI years ago about your research on personalized pricing. We are in certain circumstances prepared to accept different prices. It's the summer of vacation in Northern Hemisphere is coming up, many of us will be going on vacation. We will have paid very different prices than the person we're sitting next to on the plane or the person in the hotel room next door to us. But we accept that. Why do you think there's that difference there?

Jean-Pierre Dubé: Are you sure?

Hal Weitzman: Well, maybe not. Tell me, is there resistance to that?

Jean-Pierre Dubé: I've been baffled by some of what we've seen in the media in the last couple of years when it comes to personalization. You're absolutely right, if I want to go on a vacation, the amount I pay depends on when I go. So the prices do vary during the course of the year for a hotel in Florida. If I want to go in spring break, I'm going to pay a lot more than if I go in April or if I go in February. So we know the prices vary over time and clearly across people. For some people, it's impossible to go at those off-peak periods and they can only travel at spring break. So you'd think, hey, this seems really unfair too but somehow it's normal and we've accepted that. But meanwhile, when Wendy's merely proposed that they might use that kind of dynamic pricing, it didn't just cause a public outrage. We had our elected officials started calling out Wendy's and challenging their ethics. And last time I checked, hamburgers are not a required thing.

This is not a necessity. This is not like using dynamic pricing on hand sanitizers in COVID or in gasoline prices during a weather crisis. This is hamburgers. But somehow it's okay to do dynamic pricing on trips, but elected officials are calling out the ethics of dynamic pricing on hamburgers.

Hal Weitzman: Why do you think that is? Because many of us will use Uber. We know that the price of Uber changes minute by minute, but there's not a big revolution against Uber based on pricing anyway. So why do you think it is that we are prepared on some cases, but not as you say, when it comes to things like food. Or even if you go into the store and you say the nominal price is the same, you know what you're going to pay for the jacket.

Jean-Pierre Dubé: People are triggered by change, and sort of sad, I suppose we're in an era where anytime a business makes money, the assumption is that somehow this is a zero-sum game and that this must be at the expense of the customer. But coming back to the world of personalization, those experiments that you referred to, not the ones with the city but the ones I did with businesses, what we routinely found was that when we personalize prices the average price that someone gets charged is lower than the uniform price we would've charged in a world where everyone pays the same. What that means is that the average person is paying less. There are some people who will pay more, and it does act a little bit like a progressive tax scheme. Some people will pay more, but that doesn't mean that consumers as a whole are put at a disadvantage.

Not only is it possible that the majority of people could pay less. But most importantly, the people who are paying less might be those who are the most disadvantaged in the first place. The kinds of folks who you'd want to help and give a better shot at getting access to goods and services.

Hal Weitzman: Remind us of the experiment that you conducted about pricing with the recruiting company.

Jean-Pierre Dubé: Yes, I worked with a digital platform. We ran an experiment for a month where about 8,000 of their customers who hit their paywall were charged a randomized price. Their regular price was a subscription price of $99 a month, but we tested prices as low as $19 a month and as high as $399 a month. Just to step out aside of that experiment for a moment, imagine if Tropicana orange Juice was regularly charging six dollars a gallon not from concentrate premium juice. And as a part of a price test experiment with a temporary test price of as much as $20, that's kind of what that experiment did. And we use those data as we're going to do with this water utility we were discussing earlier, to train a machine learning algorithm to determine what features of customers, these are customer attributes if you will, are associated with their willingness to pay.

And we then ran a second experiment with a whole new batch of customers, thousands of them. And we did a horse race between getting the uniform optimal price versus getting the price that the algorithm would charge you based on your customer features. And there we found that almost more than 60% of the customers paid less under personalization than they would've paid under a uniform price. Which means that not only were the average person much better off, actually the median person was much better off which means the majority are better off. But on top of that, we increased access.

Hal Weitzman: Right. But there's a postscript to that story. What happened? After you stopped the experiment with the company they abandoned the system, right?

Jean-Pierre Dubé: Competition, they were afraid as competitors entered. But the postscript a little more nuanced than that.

Hal Weitzman: Okay. There's a PPS.

Jean-Pierre Dubé: Because what they did do was raise their price.

Hal Weitzman: Okay.

Jean-Pierre Dubé: They raised their price-

Hal Weitzman: But for everyone,

Jean-Pierre Dubé: For everyone, they were massively undercharging. But the personalization they go, if we do personalization, this gets out in the public domain, it'll be a PR nightmare. Which is ironic because under personalization they would make more money, but more customers would get served and the majority of customers would pay less. Why that would be perceived as less fair, I find strange. But that is the reality of where we are today.

Hal Weitzman: Okay. So it sounds like the psychological barrier on the fairness could be overcome with the use of discounts. If everyone has the same nominal price, but some people get bigger discounts than others, we're more likely to accept it than if the nominal prices are different as in the case that you described.

Jean-Pierre Dubé: It sounds silly because the net effect is exactly the same. I'm not sure why it makes any difference. Maybe this is a loophole to work around certain laws, at least in the case of municipal services. But that seems to be the case, supermarkets already do this, many online businesses already do this. You get coupons emailed to you on a regular basis, those aren't always sent out to the entire population.

Hal Weitzman: Right. Okay, so if we are going to get to this future of personalized pricing and personalized fees, it might be that it looks like everybody pays a standard price but in reality, we're all paying different prices.

Jean-Pierre Dubé: That's a possibility. And then on net we pay different prices even though the sticker price was the same for everyone.

Hal Weitzman: Well, JP, thank you so much for coming on the Chicago Booth Review Podcast. It has been a great conversation.

Jean-Pierre Dubé: My pleasure.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.