Decrease parking ticket fines and extra might result in extra income within the metropolis

Consider the current situation: more than a decade of economic volatility has created budgetary constraints for governments at all levels. Politicians are reluctant to raise taxes and there are few other ways to generate income. Many local governments have fined to fill their coffers. Fines are fit for purpose and make political sense, as elected officials can say the budget is not balanced by taxpayers as a whole, but at the back of people who break the law. If you don't want to pay anymore, all you have to do is follow the rules.

Chicago Mayor Lori Lightfoot uses this game book. Until recently, anyone caught on camera driving 10 mph over the speed limit was fined $ 35 and up. But the city will soon also be getting ticket drivers who are 6 to 9 mph over the limit. This plan is reminiscent of a plan back in 2012 when Mayor Rahm Emanuel tried to raise $ 16 million by increasing the fine for missing a vehicle sticker from $ 120 to $ 200.

This phenomenon extends beyond Chicago, as other cities in the US facing declining tax bases are also relying on fines to balance their budgets. A 2019 study by Governing Magazine found that the vast majority of local U.S. governments fined less than 5 percent of their general fund income, nearly 600 local jurisdictions raised more than 10 percent this way, and 284 governments raised more than 20 percent . (I believe these are conservative estimates, as some communities put money in hard-to-track locations and the report doesn't include locations with fines of less than $ 100,000 per year.)

However, if the Chicago experience indicates it, plans to raise money this way won't bring in as much as expected – and bury some of the poorest people in debt. As of 2018, Chicago drivers have imposed more than $ 275 million in unpaid fines for city sticker violations since 2012, far more than the original revenue target, and this is causing many of them financial ruin. According to ProPublica, 1,000 Chicago residents who filed for Chapter 13 bankruptcy protection in 2007 have taken unpaid city tickets into their debt. However, by 2017, 10,000 people who filed Chapter 13 had city penalties listed under their unpaid debts. The amount owed increased from $ 1,000 to $ 3,900.

It is regressive to charge everyone the same fine. Fines, as well as related fees and costs, can destroy someone who is struggling financially. Steven Mello of Dartmouth notes that a $ 175 transportation ticket causes people in Florida's poorest quartile to experience financial hardship similar to a significant drop in profits. A ticket is often associated with processing fees and administration costs. Failure to pay on time could result in a higher fine. Someone unable to pay $ 175 on time could have thousands of dollars in debt in a matter of months. The Conference of State Court Administrators (COSCA) reports that 10 million Americans owe the criminal justice system more than $ 50 billion.

Mello linked data on traffic tickets issued in Florida between 2011 and 2015 with the monthly credit reports and payrolls of recipients of a large number of employers. In the year following a traffic obstruction, he found that poor drivers saw a percentage point decrease in the likelihood of wage income, suggesting an increased likelihood of unemployment or a change of job. Have some of these people suspended their licenses because they could not pay for the transport ticket? According to a 2018 estimate by the Washington Post, more than 7 million Americans may have lost their license due to unpaid legal or administrative debt.

Without the ability to drive, many people cannot work. In New Jersey, according to COSCA, 42 percent of those who were suspended lost their jobs as a result of the suspension, and 45 percent of those who did not regain their jobs until they regained their driving license.

Obviously, if a person cannot drive or work, a city is less likely to be able to impose a fine. The unintended consequence of disproportionate crime among the poor exacerbates pre-existing symptoms of poverty – and does not generate any revenue for the city. Without measures that take into account an individual's solvency, those on the lowest incomes are most vulnerable to continued to accumulate debt and penalties, and to pay larger fines. I recently examined Chicago city data for the 2018-19 period on individuals with crime assigned to a debt collection agency. Ninety percent of these fines were concentrated in 20 zip codes, mostly populated by Black Americans and Hispanics.

There's one more problem with uniform fines: they may not stop many people from engaging in the behavior in question. A ticket worth 175 US dollars should not have stopped the joyrider of Switzerland. Wealthy people may take a six-figure fine to deter the behavior, while $ 175 can easily put off someone in poverty.

There is a better way

However, there is another option, a win-win strategy that would help cities raise more while the poorest do not suffer the financial consequences of the current system. The answer is personalized fines, which set prices for individuals based on their solvency. Personalized fines can be low enough for people to pay but high enough to be a deterrent even to wealthier citizens. In this way, some fines are already being imposed in Switzerland and Finland, where a record ticket was issued in 2002 for 116,000 euros (103,000 US dollars). These countries are more likely to collect their tickets because they recognize that a person's propensity to pay a fine is elastic, as is the demand for goods and services.

Think about how a company can achieve a uniform price for a product. When a price is low, more consumers can afford the product, but the profit margins per paying consumer are small. When a price is higher, margins per paying consumer increase, but the number of potential buyers decreases. The company wants to find the sweet spot where it optimally balances the number of paying customers against the margins per paying consumer.

This single pricing strategy knowingly excludes some potential consumers who may wish to purchase the company's product, but not at its current price. The same applies to one-size-fits-all fines. There are many people who want to pay the fine but simply cannot afford it.

A company that instead sets prices based on a customer's willingness to pay can make far more money. Cinemas have been charging lower prices for children and seniors for decades. Similarly, most B2B companies that employ field sales force their salespeople to negotiate discounts on regular prices. Even many public transit services like city buses long ago introduced such segmented pricing by offering tariffs for students and seniors. A similar tactic is used in places like Chicago, where people demonstrating financial distress can meet with a city representative to get payment plans and waive portions of late fees. San Francisco recently introduced waivers of up to 80 percent of the original fine. However, these systems do not scale and are prone to human error.

The advent of data and artificial intelligence enables us to implement scalable solutions that optimize the way in which we aim for different prices. I have proven this concept with my booth colleague Sanjog Misra. We conducted experiments with ZipRecruiter, a company that charges a monthly fee to make it easier and faster to find and review qualified applicants. ZipRecruiter had done well in charging all customers a single price, but we thought it could potentially serve more customers by offering them different prices.

When new customers signed up for ZipRecruiter for a month, we charged random amounts between $ 19 and $ 399. We have collected data on the companies that have accepted and declined the offers. Then we used that data to create an algorithm that would determine the price a company would be willing to pay. In a second experiment, in which the optimized personalized prices were tested, the revenue increased by 84 percent compared to the initial value. (For more information, see "Are you ready for personalized pricing?" In spring 2018)

Fines are also elastic in the sense that the individual has a certain amount of discretion when deciding whether to pay or not. If a fine is affordable, it is likely that a person is paying it either out of a sense of duty or to avoid penalties. Since few people budget for tickets, this money has to come from disposable income. Wealthier scoffers won't struggle to find a few hundred dollars to pay off a ticket, but less wealthy offenders may already struggle to meet basic necessities, let alone a fine. The person who is fined for a city sticker may not initially have the money for the renewal sticker, much less the fine. According to a 2018 Federal Reserve report, nearly 40 percent of Americans said they couldn't raise $ 400 in an emergency.

At this point, many have a choice of borrowing the money they need at a high interest rate or taking it out of other budget items. You can choose between paying the fine or rent, the water bill, and the groceries tab. It has become very clear that people in this position house, clothe and feed themselves and their families.

A flat-rate penalty is even more regressive than a flat-rate income tax rate. Illinois residents are expected to pay the state 4.95 percent of income regardless of their income. A $ 200 ticket is 0.13 percent of the income of a person who earns $ 150,000 a year. However, it is more than ten times the financial burden on a federal poverty level person. Almost one in five Chicago residents lives on or below the poverty line.

The main difference between products and fines in terms of elasticity of demand is the impact. If a new blender costs more than you want to spend, don't buy one. However, an unpaid fine will result in higher costs.

If a fine were based on the ability to pay, both the fine and the city would benefit. If a perpetrator who can't afford $ 200 can bring in $ 50, the amount remains daunting, the ticketed person is not burdened with insurmountable debt, and the city is raising money.

I hope to test the personalized fines theory soon by working with a company, SERVUS, that uses artificial intelligence to create payment options for individuals. The goal is to collect as much as possible for a city, health facility or utility while keeping payments manageable. In some states, it may be illegal to impose a personalized fine on each ticket, but a city can award a portion due, which amounts to personalization for people in financial difficulty.

SERVUS currently uses solvency as the basis for determining a person's obligation, but the system could benefit from more data. Along with SERVUS, if we were allowed to investigate by a city, we would randomly aggregate fines for people who cannot pay. We would test how much a person showing financial hardship could pay. This information would be used to inform an algorithm that could then provide data-driven relief to people receiving fines that are above their means of payment.

This is an incredible opportunity. Following the introduction of fines, San Francisco saw an almost instant increase in fines. ZipRecruiter found that it could almost double its profits if it adopted such a personalized model for its business. (This didn't happen for a variety of reasons, including a shift in product offering and a change in the competitive landscape.)

SERVUS has a relationship with a company that Chicago fines with. Given that the city of Chicago raised $ 272 million from parking and automated camera tickets in 2018, a sizeable increase in fundraising would go a long way towards closing its budget gap. Even if Chicago for some reason choose not to impose personalized fines or penalties, the proposed investigation could help identify an optimal fine rate to maximize the amount raised – or perhaps two optimal rates that would allow the city to to use a different phrase for citizens who can prove financial hardship.

With this plan, the most financially vulnerable residents of the city would be better supplied. Outside of Chicago, there are many places that could benefit from a plan that would generate additional revenue but not bankrupt the most financially vulnerable citizens. We need a city to sign this idea and research could begin.

Jean-Pierre Dubé is the Sigmund E. Edelstone Professor of Marketing and a Charles E. Merrill Faculty Scholar at the University of Chicago. This piece originally appeared in the Chicago Booth Review.