Abstract

The taxi industry in Italy is heavily regulated. Strong entry restrictions are legally enforced, and even firms are prevented to run the service: only the taxi driver in person is entitled to own one single license (the medallion). Under this legal system, a very large allocative inefficiency arises, because customers are harmed by an insufficient supply, and property rights of the medallion cannot be freely allocated through market exchanges. In this industry, monopoly rents are often not used for profit maximization, but rather to enlarge the idiosyncratic wellbeing of the taxi driver (e.g. to increase its leisure time by reducing working hours). The problem does not depend on the license system "per se" - all over the world it is the preferred institutional choice as the most effective tool for reducing opportunistic behaviors - but rather on both weak incentives to profit maximization and inefficient regulatory performances. Between 1980 and 2002, the price of medallion in Rome increased on average by nearly 2 percent per year at constant prices, peaking by 13 percent at each new medallion issue (beacause the demand overwhelmingly exceeded the modest increase of supply).