Free to cruise: Designing a market for tradable taxicab rights

In metropolitan areas, taxicab regulation often has exclusive cruising regulations that prevent taxis affiliated with one jurisdiction from picking up passengers in another. When multiple cities are in close proximity, empty return trips occurring after taxis drive passengers from one jurisdiction to another results in inefficiency. This source of inefficiency can be eliminated by creating a combined affiliation and letting affiliated taxis pick up passengers in any jurisdiction. Under combined regulation, however, drivers may have an incentive to direct their search in a manner that leads to an allocation of taxis across locations that is not socially optimal. We develop a regulatory exchange market that maintains separate affiliations but provides drivers the ability to exchange the right to pick up passengers in each other's affiliated location. The regulatory exchange market is preferred to both exclusive cruising and combined regulation, and achieves the first-best in a large class of situations.