Why Do We Tip Taxicab Drivers?

Abstract

The leading economic explanation for tipping - that is, explanation why the practice is socially beneficial, not why individuals leave tips even though it is not narrowly advantageous to them - is that it confers an incentive to provide personal services. This fits many instances in which tipping is common but does not fit the taxicab business very well. I propose a novel explanation for tipping that does fit the taxi case. It is that tipping amounts to Lindahl pricing of the services of vacant cabs (essentially, reduced waiting time), a local public good for taxi customers.

Keywords: tipping, taxicabs, Lindahl pricing, social norms

JEL Classification: D40, D82