Tipping Points

tippingMario 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.

You’d never know it from DeLong’s selective summary, but Rizzo’s post is dense with interesting (if elementary) economics. A key point is that when you think you’re tipping a New York cab driver, you’re really tipping the medallion owner. (A medallion is a license to drive a cab; medallions are in fixed supply and currently trade for a price of about three quarters of a million dollars. Your driver is probably leasing his medallion from its owner.) If we all started tipping, say, an extra $2 per ride, then medallion owners would demand another $2 per ride in rental fares—effectively claiming all the additional tips for themselves. (Click here for a slightly longer explanation.)

Likewise, Professor Rizzo and others like him can make life harder for cab drivers in the short run, but not for long. Eventually, low tippers force medallion owners to accept lower rental fees, so that drivers are made whole again. (In brief: With tipping down, some cabbies are disheartened and unwilling to continue driving unless rental fees come down; medallion owners must comply or lose their rental income altogether.) So in the very short run, he’s hurting cab drivers but in the longer run he’s hurting medallion owners and striking a blow for what he considers a desirable change in social norms.

Personally, I don’t mind tipping but I found a lot to chew on in Professor Rizzo’s post. DeLong, true to form, ignored the content and jeered like a third grade bully. Most sadly, whenever he indulges this habit, DeLong sacrifices a chance to teach a little economics. Fortunately, the web is a big place and there are plenty of alternatives for readers who care about ideas.

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35 Responses to “Tipping Points”


  1. 1 1 Bennett Haselton

    Would the same reasoning imply that almost any act of kindness (not just tipping) towards employees in any given sector (not just cab drivers) is wasted?

    If students are nice to their econ professors, that makes econ professors enjoy their jobs more. So, all other things being equal, that means their employers can now afford to pay them less in the long run, to the point where, according to the preferences of the average professor, the drop in pay exactly offsets the enjoyment of their students’ friendliness. (That’s just for the average professor; if you value student friendliness more than average, you’ll be better off after the change, but if you value friendliness less than the average professor, you’ll be worse off.)

    Conversely, if you ever fall on hard times, you can rally your readers to start soaping the car windows of econ professors and smuggling incontinent livestock into their department offices at night, then demand a raise to put up with the increased harassment that your profession is facing…

  2. 2 2 Joe

    Except… that tipping effectively puts a floor on the “real” minimum wage for many jobs. I have known many bartenders, waitresses, and others for whom tips make up by far the largest part of their income, some of whom get take-home pay on par with college profs and engineers, though this is less common for waiters working at casual restaurants rather than high-end steakhouses and bars. Despite this they still sometimes receive at least some amount above minimum wage from their employer, which is interesting in and of itself. Psychologically I have a similar response to the practice as Rizzo: I feel not only annoyed at having to tip but annoyed at myself for feeling that I have to tip. Growing up I was taught that tipping of any amount was kind of magnanimous and ought to be sincerely appreciated (German family influence, even though I grew up in Canada). My mother recently asked me whether hairdressers expected tips — she had noticed some attitude from one she had visited repeatedly. I think she probably did tip a little even before but I guess it wasn’t up to the “standard”.

    Cab drivers are often independent contractors who pay to rent the cab, so the owner can in those cases gain the full “tip surplus” as you suggest. But AFAIK in every state employers are not (any longer) allowed to charge wait staff for the privilege of serving, and this applies to all regular service employees.

  3. 3 3 Sean

    “Would the same reasoning imply that almost any act of kindness (not just tipping) towards employees in any given sector (not just cab drivers) is wasted?”

    There are no acts of kindness in classical economics! ;)

    The problem with the NY Cab system is that it is distorted by a licensing system. It is illegal to give a person a ride to the airport in exchange for money without being licensed. Take a look at regulatory capture theory. If everyone tips 20% this is factored into the licensing and further distorts the market.

  4. 4 4 Snorri Godhi

    For the benefit of those of us unfamiliar with American tipping habits, it would be helpful to clarify that Mario Rizzo’s post is not about why he gives tips, but why they are small. At first I thought that DeLong thinks that one should never give tips.
    It is amazing that a medallion can cost as much as a mansion (though not a mansion in the New York area.) Those who buy a medallion should reflect that prices can go down as well as up: the City can flood the market with medallions at any moment, I presume.
    As for Brad DeLong, I read 3 of his papers on economic history and they were quite instructive. I don’t read his blog, though.

  5. 5 5 Harold

    Why is the price of medallions rising so sharply? What’s in it for the medallion issuers to keep the supply so low? Is there just no room for more cabs?

    On the tipping, Mario Rizzo may be right long term, but the cabbie that picks him up bears all the cost, and the benefits are spread over all cabbies. As long as everyone else carries on tipping as before, then the cabbie is justified in feeling a bit put out. If everyone carries on tipping as before, he will probably get over it quite quickly.

    I don’t understand why tipping is so prevalent in the USA. Tipping is expected in a wide, but somewhat arbitrary range of services. Elsewhere in the world it is restricted to a much narrower, but I suppose still arbitrary, range (strangely often including cabs). The amount tipped is also much higher in the US.

  6. 6 6 AC

    Good smackdown of DeLong, although he may point out that you are just revealing yourself as an idiot and a moron and he might be forced to ask “why oh why” again.

  7. 7 7 John Faben

    Steve, if everyone already tips $2 per ride, wouldn’t it be more likely that if everyone stopped tipping then the price of a taxi ride would go up by about $2 per ride (rather than the medallion owners being happy to just let their customers keep that $2 which they were previously able to implicitly charge).

    In other words, assuming that the market is competitive – surely the price of a taxi-ride already takes into account the fact that most people will tip, and is less than it would be otherwise. By not tipping you’re paying less than the market price.

  8. 8 8 Vika

    Interesting. I’m bumping up against the prisoner’s dilemma here: given that I don’t have any way of knowing how the thousand people before me and thousand after me are going to tip, nor whether they’ve even heard of Rizzo’s line of thinking, how should I tip?

  9. 9 9 Steve Landsburg

    John Faben: I think the answer to your question depends on exactly why people tip. If everyone is indifferent between a $12 fare on the one hand and a $10 fare with a $2 tip on the other hand, then I agree with you that when people stop tipping the fare goes up by $2. If people get active enjoyment (or disenjoyment) out of tipping—or if tipping can affect the quality of service—the problem is a little more complicated.

  10. 10 10 Dave

    I’ve recently moved to New York from Sydney, Australia and like most Aussies am finding the whole tipping thing pretty annoying. In Australia, we tip maybe 10% at a restaurant if we feel like it and usually because we don’t want to carry $2 coins around as change and nobody really cares if you leave nothing behind. Waiters earn higher wages legislatively over there.

    Any idea how tipping can possibly even develop? Makes absolutely no sense to me. You tip AFTER you have received a service usually to someone you will likely never see again. i.e. apart from the potential abuse you might cop for leaving them bare there is absolutely no benefit to you. The person who does benefit is the person who receives the service AFTER you. Society as a whole gets the benefit of superior service on the back of everyone paying for the total stranger after them.

    How can a rational, selfish individual even contemplate tipping? Let alone an entire nation?

  11. 11 11 Pat

    I’d put my money on a 3rd grade bully. Delong reminds me of Vizzini from the Princess Bride.

  12. 12 12 Al V.

    @Dave, I mostly eat regularly at the same limited set of restaurants. I tip well, and I get better service than those patrons who don’t eat there regularly, and if the restaurant is busy, I get preferential seating. I’m paying the staff for the privilege of receiving those benefits.

  13. 13 13 Swimmy

    Harold: one explanation for the city not issuing new medallions is the transitional gains trap. Politically, elected officials would lose large favor with medallion owners were they to release more medallions. (How would you feel if the government invalidated your recent $750,000 purchase?) However, to buy off medallion owners would also be politically unpopular. (You need a kind of fiscal illusion theory here to pick up the slack of why voters dislike direct transfers relative to indirect transfers.) Meanwhile, because of the steep price of medallions, medallion owners don’t earn super-normal rents. We’re just stuck with the deadweight loss until voters change their minds.

    Rizzo’s individual tipping habits don’t affect the actual price one tiny bit. Much as voting is irrational if you don’t actually get any personal expressive (or otherwise) value from it, maybe tipping low is irrational if it makes you feel like a bad person.

  14. 14 14 Dave

    AI V. I can understand that and it is perfectly rational to do that with places you will frequent often.

    But what about a taxi driver who you will never see again?

    Or if you go to a restaurant in another town?

    Or at a random bar where you stop in for one drink?

    What is your rationale for tipping there?

  15. 15 15 xman

    I was going to leave a comment thanking Professor Landsburg for his unwavering civility. Then I realized that he is sometimes less than civil himself. He has no qualms about calling something absolute rubbish (or worse) if he thinks so. Why then does DeLong’s approach bother me when Landsburg’s does not?

    The childish name-calling is just one symptom of a much bigger problem. In DeLong’s writing, I see tendencies that do not befit an economist. Like training in karate until you react correctly and instinctively even in the face of real danger, an economist should not simply abandon the clear-headed economic mode of analysis simply because he is angry.

    One of the great strengths of economics is its unwavering commitment to reason, its extreme willingness to follow arguments from beginning to end, regardless of whether the end is unpopular. This methodology allows us to align our behavior with the things we really care about. For example, the typical person thinks that both “helping others” and “giving to charity” are simply good things to do. The economist says, “Okay, you can believe whatever you want and I won’t judge it…as delong as you aren’t contradicting yourself. But wait, I can construct a situation in which giving to charity actually hurts others, so these things are NOT necessarily aligned (see for example http://www.slate.com/id/2125822/). So tell me, what is it that you really care about? Helping others? Then you simply must ACCEPT that giving to charity is not always good, even though it seems a bit odd.”

    Or the economist may step in to delineate “preventing genocide” from the more fundamental goal of “preventing human suffering.” This commitment to following an argument to its end leads us, often, to a counterintuitive and unpopular result. Undoubtedly, many people have cited Landsburg’s genocide treatment and expressed their utter contempt. These instances do not typically challenge or even refer to the argument that was made; they simply are offended by the conclusion. To them, the piece consists only of its conclusion, which unfortunately means they have misunderstood the entire goal of the piece.

    Of course, those who actually know WHY they’re reading may not agree with the conclusion. The important thing is that the argument is all laid-out right there, and it is easy to pinpoint the source of disagreement.

    When I read DeLong, it is sometimes difficult to see the reasoning, buried as it is in the sort of rhetoric common to the realm of politics but absent from the realm of honest truth-seekers. Furthermore, when I do the necessary digging (which should really be unnecessary: DeLong is wasting my time. Either he is thinking in Economics and translating it into Angry and making me translate it back into Economics, or worse, he is simply thinking in Angry…), the reasoning is not altogether there. At the moment, I can sort of see where he’s coming from on this tipping issue, but there are so many holes and unconsidered angles that it’s impossible to evaluate. I would really like to know what he thinks is the explicit nature of the contract we enter into when we get in a cab, though as far as I can tell, I don’t think I would agree with his definition, and I don’t see why he thinks it’s so obvious that it doesn’t need to be addressed and defended.

    To be sure, I don’t think everything an economist ever says has to be a full-fledged, well-considered argument. But here DeLong is not just throwing out an idea. HE is SLAMMING someone else’s well-considered argument, and you simply can’t do that without a real argument of your own.

    I conclude that the strong words of DeLong bother me because they seem to be based in his Anger. By contrast, the strong words of Landsburg seem to be based on his Truth-seeking. When strong words are employed in this context, it does not bother me; to the contrary, I find it informative to know how strongly he disagrees with a position. Landsburg says exactly what he thinks and WHY. On the other hand, I really hope DeLong has been thinking a bit more than he’s been saying. I really hope his head is not just aswirl with Angrynomics.

    Thank you, Professor Landsburg, for your unwavering commitment, not to civility, but to clarity, and to reason, and above all, to truth-seeking.

  16. 16 16 Glen

    “So in the very short run, he’s hurting cab drivers but in the longer run he’s hurting medallion owners…”

    Are you sure that the medallion owners would take a hit? Here’s what I wrote in Mario’s comments (before DeLong decided to get nasty and personal about it):

    “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.”

  17. 17 17 Steve Landsburg

    Glen: See my response to John Faben above.

  18. 18 18 Sierra Black

    This is really interesting and reminds me of this book excerpt I read in an airplane magazine recently about how people who really LOVE their jobs – like, so much that they would do work like that for free – bring down the value of that work for everyone, because your employers rightly reason that part of your compensation comes in the form of pleasure derived from the work, so they can pay you less money to do it.

  19. 19 19 Neil

    For a social scientist, DeLong displays a singular lack of curiosity about human behavior. Rizzo is right–tipping a cabbie is bizarre, whether or not it goes to the medallion owner. Tipping my regular barber, or course, is not. How do you explain tipping the cabbie? Altruism? Why should I be altruistic to a cabbie I do not know, but not a stranger on my own street? Low wage job? Why not tip the person who checks out your purchases at Walmart?

    Examining my own behavior, I tip cabbies for the same reason Rizzo does–to avoid embarrassment when the cabbie gives your lip for not tipping. Rizzo is right–it is time to rise up against this extortion.

    Equally interesting is the failure to do productive tipping. I have found, from experience, that leaving a tip on the dresser for the chambermaid at a hotel where you are spending several nights is very productive. Perhaps I am more fastidious than average. Chambermaids are stiffed regularly (perhaps that is why tipping them is so productive.) Why stiff chambermaids and not cabbies? Probably because it is not a face-to-face interaction.

  20. 20 20 Chuck E

    Rizzo makes a great point, but I can’t stop thinking about what one of his commenters said: Tipping is influenced by the tax code, and the “savings” probably benefit both the customer and the server (cab driver in this case). It’s hard to argue with that! Maybe tipping is the greatest idea ever!

    Incidentally, this is one of the few times when non-economists understand that statutory incidence of a tax doesn’t necessarily match the economic incidence. But then people go back to believing that the employer “pays” half the payroll tax and the employee “pays” the other half…

  21. 21 21 Snorri Godhi

    If people get active enjoyment (or disenjoyment) out of tipping—or if tipping can affect the quality of service—the problem is a little more complicated.

    This got me thinking, and I realized that I enjoy going to a restaurant considerably less when I am expected to tip by American standards: I tend to worry that I am tipping either too much or too little. What is worst is that if I give a fair tip, I am troubled the most, because I am worried that I am giving too much AND that I am giving too little.

  22. 22 22 Steve S

    A little armchair psychology. DeLong has both a monstrously large ego as well as sharpened and hardened ego defenses. So my working theory is that he has Narcissistic Personality Disorder.

    Steve

    PS Did you know that DeLong routinely excises comments from people that post thoughtful comments disagreeing with him? See Glen Whitman’s post over at Agoraphilia recently defending Rizzo.

  23. 23 23 Robert S. Porter

    Tipping my regular barber, or course, is not.

    Personally, I think tipping the barber is worse. I’ve been going to the same barber, technically hairdresser, for 24 years and I haven’t tipped once. The barber is performing a specific service with a specific price listed and unless they’re doing something specifically onerous, I see no reason to tip them anymore than the cashier at WalMart or my plumber.

  24. 24 24 Steve Landsburg

    SteveS:

    PS Did you know that DeLong routinely excises comments from people that post thoughtful comments disagreeing with him?

    Yes, I know. DeLong once posted a highly critical (but not highly unreasonable) critique of a column I’d written in which I asserted, among other things, that wealthier people choose to work less. One of his other commenters characterized that assertion of mine as nothing but armchair psychology, and complained about economists just making stuff up as they go along. Because I believe that one of the single most important lessons of economics is that you can’t just make stuff up as you go along, I composed a careful reply explaining that there is good theory and evidence for this assertion, and that it’s precisely the sort of thing for which an economist would *require* theory and evidence. DeLong excised that comment. I at first thought there’d been a glitch, so I retyped the whole thing and resubmitted it, whereupon it promptly disappeared again.

    So DeLong preferred to leave his reader with the false impression that I (and by extension other economists) are intellectually careless about this sort of thing, rather than allow a little education to take place.

  25. 25 25 Neil

    Robert S. Porter says: “I’ve been going to the same barber, technically hairdresser, for 24 years and I haven’t tipped once.”

    You are so more trusting than I am of people with sharp instruments around your head and neck.

  26. 26 26 Snorri Godhi

    DeLong excised that comment. I at first thought there’d been a glitch, so I retyped the whole thing and resubmitted it

    That is one of the reasons why I make a back-up of every long and carefully crafted comment that I post, especially on a blog I am not familiar with. (Obviously, I won’t make a back-up of this comment.)

  27. 27 27 Bob

    So I headed on over to Brad’s blog, and noticed two comments taking unsubstantiated and irrelevant potshots at our gracious host regarding his genocide post. I left a short and relatively polite comment addressing the substance of the matter. I have now returned there, and lo!, my comment has been deleted, while the previous two are still there.
    Class act, that Brad.

  28. 28 28 Bill Stepp

    One thing I don’t understand is why Berkeley’s economics’ faculty and administration lets him get away with his routinely uncivil discourse. Doesn’t it reflect badly on Berkeley as an institution?
    If I were a student, I certainly wouldn’t want to have him for an instructor.
    Btw, DeLong wouldn’t have survived third grade in my school; and if he walked around the streets of New York and insulted people to their face, he’d soon pay a heavy price. Maybe one to match his weight.

  29. 29 29 Harold

    Bill Stepp – whatever you may think of him and his comments, I think It would be pretty hard for Berkeley to interfere with his freedom of speech. That freedom allows you to know about him, and if you were a prospective student, you could make choices to avoid him if you wished.

  30. 30 30 Bill Stepp

    Harold,

    As I commented recently at the ThinkMarkets blog, my point has nothing to do with free speech, the first amendment, and freedom of expression. In business, you can get fired for saying certain things that are a lot more civil than what he says. It’s about civility, not freedom of speech. If you don’t understand this, that might put you in his camp.

  31. 31 31 jj

    I’d rather you didn’t link to or discuss DeLong, even to point out when he’s wrong. The guy is a troll, only he does it on his own blog instead of (or in addition to) in other blogs’ comments.

  32. 32 32 Aaron

    Aren’t cab fees regulated by the city? If so, then it does not seem that medallion owners have the ability to increase their rates whenever they want. Instead, the average tip size would affect the value of a medallion, not the charge of any given cab ride.

  33. 33 33 Jon Garfunkel

    Checking in again — after encountering a manufactured blog-spat based on more back-of-the-envelope figuring, you didn’t have the notion to check the academic literature on studies on this subject?

    See To Insure Prejudice: Racial Disparities in Taxicab Tipping by Ayres, Vars, and Zakariya.

  34. 34 34 SPEPost

    I thought you were joking about the name calling..but no, you were spot on..

  35. 35 35 Benkyou Burito

    Niel (and the anti-tipping Aussie)

    You tip people in the service industry who (within the parameters of their job description) may make your day significantly better or worse.

    The cashier gets paid to meet a strict criteria of service expectations.

    The dancer at club Jiggles can spend that five minutes of an Aerosmith song (or SEAL, but it’s one of the two right?) however she likes but if the RNC is in the house she knows she better work for it.

    The cabbie can miss lights, take detours, drive the speed limit, obey one-way signs. But if he’s willing to catch you that plane it just seems fair to put an extra tenner in his hand.

    The practice started in restaurants as a way of facilitating small business. Tipping ensures that bad waitresses will get paid less and move along compared to a better or prettier waitress. Letting the customer administer payroll, performance review, merit raises, in the form of her take-homepay takes a load off the owner who is probably also pulling burgers off the grill in the kitchen.

    I know from experience that I get the best service in Japan where it is an insult to tip and the worst service in Sydney (only considering major cities I’ve eaten in) where the wait staff always seems bored, or drunk.

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