Charging a Late Fee for Pick-Ups - The Unintended Consequence

By Sarah Alexander
 

A ground-breaking study, published in January 2000, of what happens when parents are charged a penalty fee for collecting their child late from an early childcare centre has been influential in economic analysis throughout the world.

The findings also have relevance to, and provide important insights for, government in NZ when considering what aspects of and how much to fund early childhood education. 

Had the lessons contained in the study been recognised when the 20-Hours Free ECE Policy was developed then the problems we are seeing today with funding of the ECE sector may not have arisen.  It may have been seen in advance that without adjustments to the policy there would be a budget blow-out as parent uptake would very likely exceed expectations and providers would be strongly tempted to adjust their enrolment and child attendance requirements to maximise revenue. The difficulty - for any government - of being locked into and not being able to substantially change or do away with a funding policy once ECE providers and parents have become dependent on it may have been realised early on and addressed.     

 

Reference: Gneezy, U. & Rustichini, A, (2000).  A Fine is a Price.  Journal of Legal Studies (Vol. XXIX), pp. 1 - 17.

The Study's Abstract

The deterrence hypothesis predicts that the introduction of a penalty that leaves everything else unchanged will reduce the occurrence of the behavior subject to the fine. We present the result of a field study in a group of day-care centers that contradicts this prediction. Parents used to arrive late to collect their children, forcing a teacher to stay after closing time. We introduced a monetary fine for late-coming parents. As a result, the number of late-coming parents increased significantly. After the fine was removed no reduction occurred. We argue that penalties are usually introduced into an incomplete contract, social or private. They may change the information that agents have, and therefore the effect on behavior may be opposite of that expected. If this is true, the deterrence hypothesis loses its predictive strength, since the clause ‘‘everything else is left unchanged’’ might be hard to satisfy.

 

Direct Excerpts from the Study 

A. Background

There are two types of day-care centers in Israel: private and public. This study was conducted in 10 private day-care centers in the city of Haifa from January to June 1998. All of these centers are located in the same part of town, and there is no important difference among them. In the day-care centers the owner is also the principal. Two years of studies are required to be a certified principal. In all of the day-care centers that we studied, the manager remained in the facility until one in the afternoon. After that time the assistants were in charge. During the day children are organized into groups according to age, from 1 to 4 years old. Each day-care center is allowed to hold a maximum of 35 children. In some exceptional cases a few additional children are allowed. The fee for each child is NIS 1,400 per month. (The NIS is the New Israeli Shekel.) At the time of the study, a U.S. dollar was worth approximately NIS 3.68, so the fee was about $380 at that time.

The contract signed at the beginning of the year states that the day-care center operates between 0730 and 1600. There is no mention of what happens if parents come late to pick up their children. In particular, before the beginning of the study, there was no fine for coming late. When parents did not come on time, one of the teachers had to wait with the children concerned. Teachers would rotate in this task, which is considered part of the job of a teacher, a fact that is clearly explained when a teacher is hired. Parents rarely came after 1630.

B. The Study

At the beginning of the study, research assistants went to the day-care centers to ask the principals to participate in an academic study about the influence of fines. Each manager was promised that at the end of the study she would receive coupons with a value of NIS 500 for buying books. The principals were given a telephone number at the university that they could call to verify the details. None of the principals actually did so. The overall period of the study was 20 weeks.

In the first 4 weeks we simply recorded the number of parents who arrived late each week. At the beginning of the fifth week, we introduced a fine in six of the 10 day-care centers, which had been selected randomly. The announcement of the fine was made with a note posted on the bulletin board of the day-care center. Parents tend to look at this board every day, since important announcements are posted there. The announcement specified that the fine would be NIS 10 for a delay of 10 minutes or more.  The fine was per child; thus, if parents had two children in the center and they came late, they had to pay NIS 20. Payment was made to the principal of the day-care center at the end of the month. Since monthly payments are made to the owner during the year, the fines were added to those amounts. The money was paid to the owner, rather then to the teacher who was staying late (and did not get any additional money). The teachers were informed of the fine but not of the study. Registering the names of parents who came late was a commonpractice in any case.

At the beginning of the 17th week, the fine was removed with no explanation. Notice of the cancellation was posted on the board. If parents asked why the fines were removed, the principals were instructed to reply that the fine had been a trial for a limited time and that the results of this trial were now being evaluated.

C. A Few Comparisons

A comparison with other fines in Israel may give an idea of the size of the penalty that was introduced. A fine of NIS 10 is relatively small but not insignificant. In comparison, the fine for illegal parking is NIS 75; the fine for driving through a red light is NIS 1,000 plus penalties; the fine for not collecting the droppings of a dog is NIS 360. For many of these violations, however, detection and enforcement are low or, as in the case of dog dirt, nonexistent in practice. A baby-sitter earns between NIS 15 and NIS 20 per hour. The average gross salary per month in Israel at the time of the study was NIS 5,595. 

D. Conclusions

The evidence presented indicates that in our group of day-care centers the introduction of a fine increased the behavior that was fined and that the new higher level was not reduced when the fine was removed. These are the facts, and we have to explain them. We have presented two possible interpretations, and we have to conclude for the moment that on the basis of the data and the theory available we cannot refute either of the two. A satisfactory answer will be interesting, however, because these facts are probably more than a curious finding. 

It is true that a ‘‘large enough’’ fee would eventually reduce the behavior. For instance, many day-care centers in the United States clearly announce a fee for coming late at the start of the year, and this fee is large and proportional to the length of the delay. The resulting penalty is more severe for the average delay than the nonlinear fine we introduced in our study, even after adjusting for difference in prices and incomes in the two countries. Casual observation shows that there are few delays, but we have not examined if the average delay is different from the one in our sample. Comparing the two systems would be an interesting research project.

The study we presented shows, we think, something different, which we may summarize as follows. Fines, as well as rewards, are decided in a larger context, which for convenience we may define as a game. Many of the games we face in real life are not completely or precisely defined. This is the case even when their description is reasonably accurate, as is, after all, a contract for child care in a private day-care center. People facing this game do not come to it simply with their preferences and beliefs; they also bring to it a perception of the strategic situation they are facing. The contract that is presented to them and any modification that is made later may change this perception.

The evidence presented here suggests that introducing a fine may indeed change the perception of the game and of the equilibrium. This change may be a simple acquisition of information (as it was in the simple model we have proposed above), or it may derive from a more dramatic shift of perception, as it is in the norm we postulated: ‘‘Once a commodity, always a commodity.’’ In both cases, the effect of a change in a clause of the contract may produce effects different from what might be expected from the assumption that ‘‘everything else is left unchanged.’

We believe this is important, because there is no reason to believe that this effect is limited to minor faults, such as a delay in the time of picking up one’s child. For instance, the announcement of a government that tax evasions are going to be more severely pursued may be interpreted in different ways, and have a different effect, than the anticipated increased compliance. 

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