Taxi Tipping: Why?

March 11, 2010

by Mario Rizzo  

Every so often people become annoyed about tipping expectations, especially in New York. It is hard not to become annoyed because prices here are already so high relative to other parts of the country. And it is also often the case that service, regardless of what you do ex post, is perfunctory.  

Why am I tipping the cab driver whom I shall not see again? I tip cabdrivers very small amounts because they really don’t do anything more than drive the cab. They are not especially careful drivers. Frequently, they don’t know where things are and you then must give them instructions. Furthermore, there are now all sorts of surcharges for evenings, rush hours, and even a tax to support the inefficiently-run mass transit system that I am not taking when I ride in a taxi.  

The argument that tipping taxi drivers gives them an incentive to do a better job is vitiated to the extent that people tip a certain percentage automatically.  In addition, many other service personnel are not tipped and they do a decent job. In New York we do not tip supermarket baggers and we get our groceries bagged just fine.  

In general, an alternative to tipping is to go to another provider who’ll give better service.  

Most of all, however, anything above the competitive “wage” goes to the owner of the medallion who may or may not be the cab driver. You don’t really know.  (Only about 40% of medallions are owned by drivers, but not necessarily the one who is driving at any given time because the owners will lease the cabs to other drivers.)  

I would really like to not tip taxi drivers at all. (And sometimes with bad service I do not.) But I often do simply because drivers sometimes say nasty things to you if they don’t get a tip. It is a failing of my psychological make-up to let that bother me.  

Am I being selfish? After all, don’t they rely on tips to make a living?  

First, I am not being selfish any more than the driver who wants a tip. The real issue is for me: Is this the best use of my money? Secondly, drivers do not rely on tips to make a living.  

The market for cab drivers will settle on a competitive level of compensation. If tips are lower, their payments to the medallion owners will be lower. If the tips are higher, the medallion owners will get more. In either case, in equilibrium the drivers will get the same compensation.  

It may be the case that the medallion owners will let the drivers benefit from differential tips to incentivize the drivers’ good behavior. But the automatic tip doesn’t count. It is only the discretionary tip – a relatively small amount, perhaps less than 5% of the fare – that would have that function. But I insist that even this is of minimal importance because drivers don’t provide much service. 

Another way of looking at this is that if I do not value the marginally extra service a cab driver would give me if he received tips, then why should I pay for something I do not want? 

It is true that when I — as one individual — do not give a tip the driver gets annoyed because at that point all of the payments to the medallion owner have already been set. 

This is not really so important, however. If everyone were to act so as to reduce or not tip, this would be made up, to a very great extent, by the medallion owner in the longer run. (Not very long in calendar time because drivers would start quitting.)  

But wouldn’t a reduction in tipping hurt medallion owners? Before you feel bad about them, consider this:  

“As Wall Street still wobbles under the pressure of a weak economy, one New York asset class stands firmly on all four wheels. Taxi medallions — required licenses fastened to the hoods of all New York City yellow cabs — have rocketed in value at a time when many investments have plummeted. The average rate in July for a corporate-licensed taxi medallion in the Big Apple was a record $766,000 — up 126% from $339,000 in 2004.

“It is an industry that has always gone up,” says Andrew Murstein, president of Medallion Financial. “It has outperformed every index you can think of — the Dow, Nasdaq, gold, you name it.”

Over the past seventy years the price of a medallion has risen an average 15% per year! (This suggests an increasing relative scarcity of taxis.)

Furthermore, does the average person who takes a taxi think that contributing to this rise in medallion value is the best use of his marginal resources?

People ought not to confuse social customs (norms) and the discomfort caused by violating these with morality.  You are not a bad person if you don’t tip taxi drives much or at all. Just be prepared to tell the voice in your head that it is wrong. And don’t let any possible cab-driver annoyance spoil your day.

48 Responses to “Taxi Tipping: Why?”

  1. yupster Says:

    I’m not sure if I’m getting this right. You’re saying that my tip does not go 100% to the driver? How much of it does, then?

    If this is the case, then the entire world is being duped.

  2. Mario Rizzo Says:

    The owner of the medallion (license)sets a rental rate. Obviously, he must do this in consideration of the amount of money (fares plus tips) the driver can own. So how does the medallion owner set the rate? He sets it at the highest amount the market will bear. This means that whatever the competitive “wage” is for these services –regardless of whether you call the proceeds tips or fares –puts a limit what the owner can charge. The driver must get that amount. So the rent charged by the medallion owner is the total proceeds minus the competitive “wage.” If the tips go down then the rental rate will go down. If the tips go up so will the rent rate. (All this assumimg that the fares don’t change.)

    Therefore, the driver APPEARS to keep the tips but since the rental rate takes into consideration how much in tips he gets (plus the fares) he really doesn’t — in the aggregate and in the medium run — get more or less than the competitive wage.


  3. Tipping originated as payment in advance: “To Insure Prompt Service,” abbreviated to TIP. The bigger question is why people in the service sector are paid they way they are in the US.

    In Europe, waiters, bartenders, taxi drivers, etc. are paid wages on which they can live. Tipping is optional.

    In the US, waiters aren’t really employees but independent contractors who earn the net difference between what they owe to the restaurant and the gross amount they collect from patrons (inclusive of tipes). So, too, taxi drivers. Think of it as a modern version of tax farming.

  4. Glen Says:

    I think there are two different questions here: (a) what should the social norm be?, and (b) given the social norm, what should I do?

    You offer excellent arguments for why the social norm should be different. Nevertheless, the norm is what it is. The payment the driver makes to the medallion owner is based on the expectation of tipping. Thus, if you choose not to tip (even when the driver did his job competently), you are paying him less than he had good reason to expect; you’re breaking an implicit contract.

    As you say yourself, “It is true that when I — as one individual — do not give a tip the driver gets annoyed because at that point all of the payments to the medallion owner have already been set.” When you say this is “not important” because the rental payments would adjust if all customers refused to tip, I think you’re answering question (b) with a response appropriate only to question (a).

  5. Paul Kenworthy Says:

    There is another factor at work here which is the US tax code. Wait staff are taxed by the IRS on what the IRS thinks they should have made in tips regardless of whether they make that or not. The rational is that wait staff under-report their cash earnings, so their taxes are bumped up to compensate. In practice that means that a decrease in tips raises their marginal tax rate and they can’t raise their fee to compensate because that would raise their taxes, too.

    Don’t know if the IRS treats cabbies the same way or not, but if I were a betting man, I would always bet on the IRS.

  6. Dave Says:

    You’re making all sorts of assumptions here based on economic theory that you haven’t (and likely can’t) prove to be correct in the real world. All of your market theory relies on both the driver and the medallion holder having perfect information and acting perfectly rationally as a response. You don’t even need to leave modern text book microeconomics to know that the flow of information in most such transactions is rarely transparent, let alone perfect or that even when given perfect information, individuals do not always act to maximize their own benefit.

    Like so much ideologically neo-liberal economics, your theories are are little more than an ivory tower way of justifying your own caddish behavior. I wouldn’t be surprised to learn that you’ve never had to work for tips.

  7. Mario Rizzo Says:

    Human behavior is irrational and anything is as likely to happen as anything else. You can make this point, if you like. But the it doesn’t take perfect information and hyper-rationality to make my analysis true. It just assumes that both taxi medallion owners and drivers respond tolerably well to market conditions. Let’s try an experiment. Let nobody tip anything for one year. Let’s see what happens to the rental rate drivers must pay the medallion owners. You predict no drivers would quit and they will work at the lower “wage.” I predict the rental rates will fall. Which is more reasonable?

  8. Mario Rizzo Says:

    It is true norms are what they are. But I am urging people to be “norm innovators.” Why should we slavishly follow norms? Yes, there are expectations-disappointment costs in deviating. But that is how things change. This is a really good case in which to start. Fairly soon the burden will fall on to medallion holders who, in addition to their fantastic rates of return, are beneficiaries of a state-imposed restrictions on entry.

  9. David Flath Says:

    Tipping is a way to pay for the services of vacant cabs. More vacant cabs means shorter waiting time. Vacant cabs are a local public good and allocation is improved by Lindahl pricing. I believe that social norms persist if they improve resource allocation. This is a bit tangential to the NYC case, but relevant. For more, see my apparently unpublishable manuscript “Why Do We Tip Taxicab Drivers?”

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1403812

  10. Bill Stepp Says:

    Dave:

    Market theory does not assume anyone has perfect information, whatever that might mean. It simply assumes that people have ends and select scarce means to obtain them, sometime successfully, other times not.

    The terms rational and irrational should be expunged from economics in my view. Maybe they belong in psychology. (Can anyone give a simple explanation of what these terms mean?)
    Information is not to economics what a perfect vacuum is to physics. An entrepreneur might have all the information he needs to make a good (i.e., profitable) decision. Another one might have the same information, but interpret it in a different way. (Think of two people having polar opposite opinions about the prospects for a stock’s price.)
    Nor is economics about maximizing an objective function subject to a constraint. (That sound you hear in the distance is Samuelson rolling over in his grave; let him roll.)

    Mario’s paying a small tip to a cab drive isn’t caddish behavior in my view.


  11. To Bill Stepp: outstanding comment.

  12. Pete Says:

    A norm innovation suggestion to you Mario, leave New York. It is filthy and you could surely get a job that allowed for you to avoid public transportation completely. As I have mentioned to others in the past, cities are obsolete. (Not trying to be a jerk here, I am being serious. Jeremy will back me up.)

  13. koppl Says:

    As far as I can tell, we don’t really know why people tip. Real people tip more than “selfish” people would. I don’t think reciprocity quite explains tipping behavior. I think the question is related to that of behavior in ultimatum games. Servers tend to say that poor people are better tippers, which suggests Smithian empathy may be the key. Overall, however, I think it’s an unresolved issue in economics. If we really cracked it, I bet the resolution of the problem would ramify greatly through the rest of economic theory, although that’s a guess of course.

  14. Bill Stepp Says:

    Thanks for the compliment, Jerry. And to Pete I ask, why are cities obsolete? Richard Florida says that’s where the “creative class” is. Having lived in the ‘burbs, a couple large cities, and spent some time in the country (including working on a farm part of one summer in high school), I’ll take a city. One advantage of NYC is that you can walk to many destinations to conduct business, etc.

  15. Glen Says:

    “Fairly soon the burden will fall on to medallion holders who, in addition to their fantastic rates of return, are beneficiaries of a state-imposed restrictions on entry.”

    Does this follow from your model? A reduced willingness to pay tips does not equate to a reduced willingness to pay overall. People will still want taxis as much as they did before. The long-run equilibrium should therefore be lower tips and increased regular prices (unless the Taxi Commission refuses to adjust), with about the same overall revenues as before, and thus about the same rental payments to medallion owners as well.

  16. Mario Rizzo Says:

    Glen,

    You are correct. I think there is one benefit in making the total price completely explicit, however. It would make the restrictiveness of the small number of medallions even clearer. As the data show the price of the medallions is rising much faster than just about anything else. So it must be that the relative scarcity of medallions is rising. (Of course, there are congestion issues here in Manhattan but not in the other boroughs.)

  17. Billyfd Says:

    Of course, it could just be that you are a cheap bastard.

  18. Aaron Baker Says:

    I think Brad DeLong has the best take on this:

    “To be clear:

    If you enter into a contract with somebody, and if have no intention of honoring the terms they believe you have agreed to you, and if you know that they are expecting consideration you have no intention of delivering–if you enter the taxicab planning to stiff them and don’t say “I don’t tip” before you do so–you are then:

    a liar.
    a cheat.
    a thief.
    Normal human sociability–what Adam Smith called “sympathy”–makes us eager to make every act of market exchange we engage in a win-win deal. It makes us sad when our trading partner feels ripped off. To see this not as part of our humanity but as a weakness–as a “failing of my psychological make-up” is to try as hard as you can to not be a normal human being.

    Instead of being a normal human being, you are then trying to turn yourself into a psychopath–someone who should be turned over with a shudder to the specialists in mental disease.” http://delong.typepad.com/sdj/2010/03/person-to-stay-far-far-away-from-1-oh-boy-mario-rizzo-sure-is-crazy-march-24-2010.html

    So which one is it, Professor?

  19. Aaron Baker Says:

    Oh wait, I misread DeLong: he’s saying (correctly)that you’re a liar, cheat, AND thief.

  20. JeffreyY Says:

    Yep, sociopathic behavior wrapped up in a veneer of economics. That tipping is not enforced by law doesn’t mean it’s outside the implicit contract you enter when you step into the cab.

  21. Mark Pierce Says:

    You comment, “And even a tax to support the inefficiently-run mass transit system that I am not taking when I ride in a taxi.” How much longer and more expensive might your cab ride be if that mass transit system weren’t running? An economist should understand who benefits from mass transit and who, therefore, should bear the cost.

  22. Mario Rizzo Says:

    Is there a case for an INEFFICIENTLY run transit sdystem ? Part of the consequences of people not seeing the full cost is that pressure for efficiency disappears. This is what is missing in the traditional argument.

  23. Mark Pierce Says:

    An efficient transit system is certainly the best option, but even an inefficient system might be better than no system. There is a case for an inefficiently run transit system if the benefits still outweigh the costs.

  24. Mario Rizzo Says:

    Will it become efficient by magic? All I am saying is that the traditional model is too narrow because it assumes public decisionmakers (including municipal unions) that just happen to have their incentives coordinated with efficiency — both in the amount of the public good — or whatever you are calling public transportation — and in its provision.

  25. Mario Rizzo Says:

    I thought of about not allowing your comment since my WordPress filter “looks” for words like “sociopathic” in order to screen out people who do not have ordinary civil standards of discourse. You can use words like implicit contract if you like. However, I am getting at a deeper point: When are norms dysfunctional. When should they change? Who will do the changing? Do you believe that every norm in place is the best in the best of all possible worlds? I don’t.


  26. [...] Rizzo blogs about not tipping NYC cab drivers. I actually think tipping is a good custom. However, I think we should cut Mario some slack, since [...]

  27. Bill Stepp Says:

    If you actually read what Mario wrote, he said he tips small amounts. He didn’t say he doesn’t tip. I can imagine a service provider who does such a bad job that he doesn’t deserve a tip.

  28. Kaelyn Says:

    o.O Really? 100% of the tips does not go to the driver? I think if we tip or not is up to us not the driver. The driver should not expect anything from us since they are merely giving us service in return for an agreed price. Whether we tip or not is up to us. The taxi driver provide simple transportation. I know the economy right now is in a time of near depression. The drive are trying to make as much money as possible. However, tipping should be base on a satisfying service and not forceful pay. I once went to a restaurant where they forced me to pay 10% tip. I had to argue with them about the injustice they charged the fee. I made the owner apologize in the end. Overall, I think, the driver should not expect anything out of us in the beginning except for the price accepted.


  29. [...] Mario Rizzo has a post on why he gives small tips to cab drivers and Brad DeLong concludes that Rizzo is a liar, a cheat and a psychopath-in-the-making. [...]

  30. george Says:

    @ kaelyn, can you tell me what you do when you go to a club or a bar and they charge you something called service charge which is beside what you got, do you fight with them?!!!!!
    @ Rizzo, what i can say it that more than 50% of your info about nyc taxi business is wrong. you trying to be an ass with cabbies who bust their asses in that box for 12 hours day or night to give you a ride for few dollars a day( if you take in consideration the amount of hours they work) plus cobbies don t have a sickness day or any kind of healt insurance or benefit. have some heart for people god will make your life better and you have to know with or without your tip these people are alive. keep your pennies with you.
    source: relative of a cab driver

  31. Elaine Says:

    “Another way of looking at this is that if I do not value the marginally extra service a cab driver would give me if he received tips, then why should I pay for something I do not want? ”

    You’re right, you shouldn’t have to pay. I believe that tipping started out as a good system to incentivize not just taxi drivers, but everyone working in the service industry; however, it has gradually become a “social norm” where people tip not because the service was good but because we’re supposed to. This defeats the purpose of tipping as customers feel obliged to pay.

    However, I also believe that the tipping system has become so established that it goes beyond being merely a social norm in the sense that it would be extremely difficult to change it, at least on a macro-level. Unless a very substantial portion of people stops tipping altogether, it is highly unlikely that “the market for cab drivers will settle on a competitive level of compensation” – and in the meantime, there will be many pissed-off taxi drivers roaming around NYC.

    Ultimately, I think as customers, we should honor the so-called “implicit contract” when we are, at the very least, satisfied with the driver’s service. If the driver’s service falls below par (e.g. taking the wrong route, bad attitude etc) then I have no qualms about tipping less or not tipping at all.


  32. I think Taxi Tipping is good when u are satisfied with that taxi service then we can give him a tip.

  33. Maxi Taxi Says:

    Yes Taxi Tipping is good when we are satisfy with that service and Cab Driver.

  34. kj Says:

    princess Eugene named after & part of Nazi Eugenics. http://host01.web.officelive.com/Documents/zizzner.html


  35. i also agree with many people here, if the service is good then why not tip, no different to being in a restaurant…


  36. I think give a small money as a tip to drivers is okie. Even though we may could not him again but I feel better with a friendly taxi driver. So tips is a part of culture, isn’t it Thanks

  37. Paul Says:

    Im european. And let me tell you something.
    Tiping taxi is bull-shit!
    That american greedy mentality, trying to make money out of everything, that people come up with those ideas “lets take tip here”.
    Same goes for barbers, supermarket employes etc.

    They dont provide service. They just DO THEIR JOB.
    When someone pack you groceries, do you get any “amazing service”? NO! You dont get nothing. And you have allready paid for that “service”, when you bought products!

    Cab drivers dont do nothing neither. They just DO THEIR JOB.
    What next? Tip bus driver? I mean, why not? It exactly the same, only there is more people in the bus?
    Tip lawyers? Pilots? Police officers?
    Why not? That list can go forever! And it makes me both sad and sick, that people do those stuff.

    If you get a good service – you tip. If waitress just bring you food and you never see here again, well, you dont tip!
    You paid 20$ for dinner. Why should you pay another 4$ for her bringing you food (and thats it!).
    I never tip on take-away. Because I dont recieve any service there!
    Same for when I order pizza to be delievered. Why on earth would you tip driver?! What for?! For him doing his job?!

    Thanks god we dont have this mentality in europe. People doing their jobs, get paid for it and everyone is happy. If you do recieve gr8 service somewheare, you thank them by tipping them. And again – everyone is happy.


  38. Giving tips to taxi drivers gives them motivation to perform better. This may be very hard for some to understand especially since they are already getting paid. If you look at it from a driver’s perspective, though, they think this is a reward for a great service that they have rendered. This makes them more willing to go the extra mile for you.

  39. Dave Says:

    Tipping taxi drivers is the social norm ? Social norm in the USA is to pay the lowest price at Walmart – should the workers in India or China get tipped for making the items ? Social norm in the USA is use imperial measurement whilst the rest of the word uses metric. Social norm in the rest the of the world is for the USA to butt out of their countries affairs. But perhaps the best social norm in the USA is to let someone die because they can not afford health care, because paying someones health care plan at say $1-2 extra an hour will cause the economy to somehow collapse.

    Tipping is so wrong, businesses should pay staff appropriate amount and then sell the product at the appropriate price. Otherwise continue your system where your war veterans are on the street, people die cause pay hospital bills. And you wonder why the Amercian dream, is not reality it is delusional.

  40. Cajetan Says:

    You want a tip? Don’t eat yellow snow.
    Some of assumptions made were to tip only in the “service” industries. In the US that encompasses nearly everybody. A tip “to insure proper service” is not a fallible theory as basic market economics will drive the “producer surplus” down (also known as the bad apples). I dispute the idea that tipping motivates the tippee to provide a future benefit which the tipper will never experience as there are always entrants and exits to market participants in industries with low barriers.

    The medallion prices can be one of two categories. Flat-rate or commission based. If it is a flat-based, the tip is intrinsically priced into the service as the tippee has to go above and beyond to exceed expectations. This would be the rational behavior and most deserving of a tip. The irrational behavior associated with minimum wage lacking the ability to receive tips is the postal service, hence the term “going postal.” Once again basic market economics will reduce surplus. I think the most important factor here is that most minimum wage industries lack high barriers to entry so it can be reasoned that any surplus will eventually be erased so as to reach its optimum price point.
    If the medallion was commissioned based, the tippee has no motivation to outperform and once again we are at square #1. This seems to be the most likely scenario as ALL costs are accounted for the second the cabbie hits the meter. The rest of the price-costs is all gravy

    Tipping should emanate from your ability to do so rather than your willingness and has nothing to do with market economics. However, tipping as a social norm sets a bad precedent as it becomes expected.

  41. Aaron Says:

    I drive a cab in NJ and provide prompt knowledgable service. We are courteous and never mouth off to customers. Having said that, I’m sure u deal with some real shitty drivers in NY. Speaking for myself now I will say that without gratuity I cannot make a living. At 38% of the fare as my take home pay I earn $8/hr. that is crap. When people don’t tip around here they really are scumbags. Especially those who have enough to tip. Let me ask you? Is your income under $60,000? If not then why are you so cheap. Tips are required for services u can have done more economically. Example. Can’t tip your server? Eat at home. Can’t tip your delivery guy? Pick it up yourself. Can’t tip tip your cabbie? Take a bus. Simple as that.

  42. Aaron C Says:

    I tip the waitress just to avoid her spitting in my food next time. That’s all the motivation I need.

  43. Ron Smythe Says:

    Tip a taxi driver? For what? To drive like a maniac? To be rude? It is ridiculous. If the fare isn’t sufficient to pay a fair wage, then the driver can “work” somewhere else – like bagging groceries or digging ditches.

  44. Skt Says:

    I dont mind tipping but what I dont like is their attitude. When I would like to pay by credit card they say oh… Would prefer cash… Cash why? So they can save on tax. I agree with a lot of people here why do should I tip when the person is doing their job. I have got into cabs and when I say Hi how are you and have got no response not even a hi and for that kind of service you should expect no tip. I think so to its become a habbit in our daily lifestyle to tip people who we shouldnt be tipping.

  45. Jeremy Says:

    The reason you are tipping a taxi driver is because he has to endure snob costumers like you who acts as if they are worth more than he is who sits right next to him. Usually taxi drivers have to pay a huge percentage of their meters to the taxi owners and on most nights rely on overpayments to actually reach the minimum wage. Certainly, on nights you rode a cab, the driver likely was stressed out by the fact he has to compensate for close-to-charity labor he did on his 12 hours shifts during the pre-friday days of the week by reaching an unhuman amount of calls in one or two nights. Tips, for a taxi driver, are expected, and big tips are what should be left for an exceptional service. Not giving any tip is strictly an insult and drivers will despise and remember you. If you have the money to afford a cab, I doubt you can’t leave at least two dollars, especially when you give more than that to a girl who brings you five opened beers.

  46. Junior Says:

    In Asia, the taxi fare is much much lower than the taxi fare here in North America. Tips are not even optional because cab drivers are not allowed to accept tips. They still deliver good service because they understand that IT IS THEIR JOB to do so and the customer could issue a complaint to the taxi company if the service is terrible.

    I have no clue how much the cab drivers here are typically paid by their employers, but I really can’t tell any difference between the service provided by them and those in Asia. Sometimes I even feel like the cab drivers here would still expect tips even if they needed assistance to find places or they did nothing more than just driving.

    If the taxi company is too cheap to pay a good amount of money to their employees, it doesn’t leave the responsibility of doing so to the customers who already have to pay for the fuel, the driver’s time, the driver’s service, and several other sub-charges.

    To me, the taxi tipping culture should be completely eradicated because it just doesn’t make any sense to me at all. The taxi drivers should provide good service because they know they should, not because of the potential tips they may get.

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