Donkor was always intrigued by the fact that an unpleasant or harmful experience with a passenger did not seem to affect whether they tipped him and how much. Why? He wondered why people list in the first place.
Donkor, a marketing assistant at Stanford Graduate School of Business, explains that tipping behavior in NYC taxis is irrational. Classical economics assumes customers are logical, self-interested, and rational. But the decision to pay for the service and tip the provider extra is not the same. According to some studies, people pitch to get better service in the future. In New York, there were over 11,000 yellow taxis before the pandemic. The chances of having the same driver again are meager.
In search of another explanation for passengers’ tipping decisions, Donkor turned to the behavioral economics approach and its focus on social norms. “Tipping does not have to be mandatory, but is a discretionary decision,” Donkor says that because the model is in place, people do not avoid it. Using theoretical and empirical analysis, Donkor quantifies the economic value of New York yellow taxis. “We know that norms are important, but how much?” “How do we determine how binding they are?” asks he.
A Fare Share
Donkor could track passengers’ distances and the amount they tipped in a year using a dataset of one billion NYC taxi rides paid with credit cards. He noted that 97% of the customers left a tip. This strongly suggests a standard. The “social tip” is around 20% of the total fare.
Donkor also added a layer of analysis, analyzing how passengers interacted with the touchscreen payment devices installed in taxis. The screens offered passengers 20% or 25% of tipping options. A button was available to change the default tip amount and enter a custom one. Donkor found that 60% of passengers chose to tip using the menu. This indicates that many people prefer not to have a tip calculated in their heads.
The tip menu’s most popular option was 20%. As taxi fares increased, however, passengers began to depart from the standard rate. “Twenty-five percent of five dollars is not much. Then, when the fare is $50, you’re like, “Oh, I’m not going to stick with 20%.” I will now move away from the menu. Donkor says, “It’s better to spend my time on a calculation than to give the driver 20% of $50.”
The percentage of passengers who chose the default menu options decreased as the fares rose. More than 80% of passengers who decided to skip the menu left a tip of less than 20%.
Donkor created a model to understand better how people tip. The model suggested that passenger tipping pays the driver and avoids the psychological costs of leaving a tiny tip or not listing. You have a specific idea that you believe is right or normal. Deviating from this leads to a sense of shame or guilt. “I call it a cost of deviation from the norm,” he explains. This cost rises as passengers depart from the norm. For example, if a passenger tips 10% instead of 20%, it costs around $1.30.
Donkor: “There is a tradeoff.” How much will I save by adhering to this standard? This context allowed me to quantify the unobservable behavior fundamentals we know are important but hard to measure.
The model quantifies how much a passenger costs to ignore the menu and calculate their tip. Donkor explains that the price is the mental effort of doing it yourself. This calculation, also known as the menu opt-out costs, is usually around 90 cents. Donkor says people prefer to pay $1 rather than calculate 17% of 13.75.
Improve Your Tips
Both drivers and customers benefit from on-screen tip menus. Donkor says, “If they don’t have any menu choices, then you force them to calculate it themselves.” If you gave them the right menu options, they would get more tips so that the drivers would make more money. It also improves the welfare of customers, as they do not have to calculate.”
This quickly adds up. Before the pandemic, New York City had more than 250,000 taxi rides per day. The amount passengers save by choosing a default tip, plus the increased average premium for drivers, is significant. Donkor calculated that before COVID was implemented, the tip menu increased both cabby’s and riders’ welfare by more than $200,000.
Donkor’s findings are relevant to any industry that relies on tips to generate income. This includes cafes, restaurants, and delivery services. Donkor says tip menu suggestions “can increase wages for workers without necessarily making things worse for consumers or stealing money from them.” Donkor says that the workers don’t need to perform as many calculations. We make it easier for them to calculate. This is a win-win scenario.