Horseshoes, hand grenades, and regulatory enforcement: Close experience with potential sanctions and fraud deterrence

We investigate the deterrence effect of experience with regulatory enforcement on fraud in a unique natural setting. Using ride-level data on New York City taxicab drivers, we identify drivers who fraudulently overcharge customers and pair them with the outcomes of drivers’ experience with regulatory enforcement (taxi court). We examine whether drivers’ experience with the taxi court, specifically whether the taxi court found them guilty or not guilty of fraud, affects their subsequent fraud. Interestingly, we find that the effect of experience with the regulatory enforcement on the likelihood of future fraud depends on the verdict received. Consistent with an impact bias in drivers’ affective forecasting, drivers who are found guilty (not guilty) are more (less) likely to commit fraud than similar drivers without recent taxi court experience. Our results have implications for academics and policymakers by showing that sometimes the threat of enforcement can be more effective at deterring future fraud than the actual enforcement itself.