NYC Taxicabs, Tips and Credit Cards

Marginal Analysis: How Much to Tip?

Jun 7, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Humor, Labor, Regulation, Thinking Economically • 225 Views    No Comments

On Wednesday, I entered a cab on 55th Street near 5th Ave. in NYC. Although I was going to 30th St., the driver proceeded west and then north because it was illegal to make a left onto 5th and head south. Trying to make a right on 6th, a right on 56th and then another right turn to head where I wanted to go took 30 minutes. Between gridlock and then a van that rear ended us with the cab driver exiting to discuss the mini-accident, the meter ascended to $10 and we had gone nowhere!

25 blocks, 50 minutes and $22 later, I had a tipping decision.

When I paid by credit card, the machine asked if I wanted to leave a 20%, 25% or 30% tip. (Or, as one WSJ writer said, “Yes, offering a 20%, 25% or 30% option is like asking whether the service was awesome, super-awesome, or super-fantastic-platinum-with-kittens-awesome.”) Less obvious, offering whatever gratuity I wanted was an alternative.

Cornell professor Michael Lynn has studied tipping decisions.

In a recent paper he tells us that the service workers who receive tips from us include bartenders, barbers, concierges, parking valets, restaurant waiters and taxicab drivers. Somehow one researcher arrived at a whopping $45 billion as the total amount we tip in the US during one year. The reason? We might want to reward good service, to provide income to the recipient, to do what is “right,” to follow a social norm, to gain status.

If and how much we tip can vary based on whether we are Asian, Hispanic, White or Black, old or young, do or do not attend religious services, and our political affliliation. It can also be affected by the day of the week, the time of the day, the sex, attractiveness and race of the service worker.

Equally accurate, though, was a WSJ writer’s analysis of a taxi cab tip:

  • “First comes to the guilt: He drove all the way out to Brooklyn, and he probably won’t get a fare back, … and he’s only making $110 a day working a 12-hour shift even though he was probably a Nobel Prize-winning physicist back in his homeland. I better tip him a million dollars!”
  • “Then comes the resentment: “He never said hello. He slapped himself on the forehead when I gave my destination. He talked on his phone the whole time…Three bucks is good enough.”

Our bottom line? Economists who try to understand our tipping behavior are engaging in marginal analysis as are we whenever we contemplate how much longer to sleep, how much faster to drive or how much to do anything extra.

What tip would you have given my cab driver?

Sources and Resources: HT to Freakonomics for their fascinating podcast on tipping and their introduction to Michael Lynn’s work. Perhaps the most insightful column on tipping, fun to read and the source of my quotes was from the WSJ. Finally, focusing solely on tipping taxi cab drivers in New Haven, this paper was thought provoking.

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