And the reason it doesn't work is because carriers (except for T-mobile) do not offer consumers any monthly discounts in exchange for not incurring a subsidy.

I have to pay the same $XXX.YY per month whether I buy the subsidized phone or whether I buy one off the street without service.

Where's the incentive to spend $300 more for a phone if the long-term cash benefit of the deal is zero dollars? Especially when an outside purchase makes warranty work a nightmare and makes handset insurance almost impossible to get?

The carriers are driving the contract model hard with these policies. They don't want the consumer to see any kind of advantage to off-contract service.