Tip Suggestions and Service Efficiency

Abstract

That customers respond to tip suggestions is well-documented, but less is known about how changing tip suggestions impacts service quality. Leveraging the unique setting of New York City taxicabs, we document that increasing tip suggestions improve driver efficiency (e.g., shorter distance) only when total fares do not respond to changes in distance or duration. Further analyses reveal that drivers' responses are driven by higher returns to fast turnarounds rather than an effort to induce higher tip rates. Findings from this paper thus provide novel evidence that changes in tip suggestions can impact supply-side behavior, such as service efficiency. Our results show, however, that the effect will likely vary based on the market setting, particularly the pricing mechanisms and the opportunity cost of slower service.

Keywords: Tips, Suggestions, Taxi, Service Efficiency