Taxi Tip Nudge

by on December 6, 2012 at 11:45 am in Economics, Travel | Permalink

NYTimes: New York’s cabbies howled when the city began forcing them to take credit cards. Some even went on strike, calling the requirements a kowtow to tourists and a burden on drivers.

But two years later, the back-of-the-cab swipe has emerged as an unlikely savior for New York’s taxi industry, even as other cities’ fleets struggle to find fares in a deep recession.

The saving grace appears to be a simple nudge. Before the credit card swipe system the average tip was around 10% but the computer offers three tip sizes 30%, 25%, 20% and the average tip has now risen to 18-22%!

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

Sometimes it can be better to be nudgy than pushy, even in New York.

Hat tip: Cheap Talk.

Todd December 6, 2012 at 11:56 am

“The higher tips are tempered by a 5 percent service fee applied to fares that are paid with plastic. Drivers must also wait anywhere from a day to a week to retrieve their fare money paid by credit cards, and they said the machines occasionally break down, resulting in lost fares.”

Who does this 5% fee go to?

And I assume a similar phenomenon, a few decades earlier, resulted in higher tip income for servers in restaurants?

msgkings December 6, 2012 at 12:13 pm

Yes, because a few decades earlier restaurant diners started paying for dinner using electronic touchscreens with tips of 20, 25 and 30% pre-selected for them to choose.

Urso December 6, 2012 at 1:24 pm

I was at a restaurant recently where the credit card statement included, as one of the cost items, a 20% tip (this was for a small party). Then a subtotal, including the tip amount. Then, below that, a line titled something like “additional tip.” I wonder how many people at that restaurant just glance quickly at the subtotal and add 15% tip on top, leading to effectively double tipping.

Dan Weber December 6, 2012 at 2:56 pm

Le service est compris!

Dan W. December 6, 2012 at 4:49 pm

If a restaurant puts on an auto gratuity and the server doesn’t put a big circle around it on the bill, that’s worthy of a big complaint or possibly the absence of any of my continued business.

derek December 6, 2012 at 9:04 pm

I’m certain the feelings are mutual.

Dave Barnes December 6, 2012 at 12:07 pm

Why do we tip taxi drivers anyway?
They do not work for 1/2 minimum wage the way waiters do.

GiT December 6, 2012 at 2:29 pm

With fare regulation, rising gas prices, and the costs for a driver of getting access to a taxi medallion, they don’t necessarily make out particularly well, and may end up working at sub-minimum-wage rates.

jimi December 6, 2012 at 7:43 pm

So what?

GiT December 6, 2012 at 9:52 pm

Serious question: Are you stupid? Figure it out for yourself.

Brian Donohue December 7, 2012 at 12:57 am


Way to strike a blow against the clumsy hand of government!

societax December 7, 2012 at 1:17 am

Many drivers do not own their own medallions. Rather, they drive for fleets that own the cars, and thus the medallions. Owners frequently treat them pretty poorly, including imposing extra charges on the drivers. A recent investigation has led the taxi and limousine commission to revise new rules to make it easier to report and correct unfair practices imposed on drivers.

Thom December 6, 2012 at 4:21 pm

I rarely if ever am in a situation where I find a cab to be worth it. $30 to ride in a car for 15 minutes? Uh, no thank you. I’ve always wondered who rides around in those things.

mulp December 6, 2012 at 6:56 pm

People the automakers refuse to serve?

Auto salesman: Hi! can I help you?
Customer, yes, I hope so. I’m tired of paying $30 for a 15 minute ride because I think it cost me way too much.
What do you have to offer? I figure I can afford $100/week, including taxes, fuel, parking fees.
Auto salesman: sorry, we only sell cars; the Wal-Mart is down the street. They sell cheap shoes and bicycles.

The Anonymouse December 7, 2012 at 5:59 am

“People the automakers refuse to serve?”

That is a very strange way of saying “people who can’t afford a car.”

Do automakers refuse to make cheaper cars, or is that safety and environmental regulations make it impossible to sell a $2000 car in America?

Could a Tata Nano be sold in the United States?

Thom December 11, 2012 at 2:08 pm

In other words, poor people who are too stupid to stumble on to a used car lot? Anyways, there are also other options. I’ve spent years of my life at a stretch carless and I’ve never been tempted to take cabs.

Larry Siegel December 12, 2012 at 2:28 am

People whose self-evaluated opportunity cost of wasted time is higher than $30 per 15 minutes, that’s who. (As my father used to say, get a job.)

Matt December 7, 2012 at 9:33 am

Because in America we tip for everything. I half expect to see grocery bag boys with a tip jar one day.

ptothe December 7, 2012 at 11:29 am

Come to Brooklyn. Every grocery store in my hood has a tip jar at the register.

axa December 6, 2012 at 12:08 pm

the 5% transaction fee is strange. Visa merchant discount is average 2% and american express 3.5%. taxi drivers are being screwed.

where’s the 10% tip option?

Erik December 6, 2012 at 12:10 pm

The 10% tip must be typed in manually.

Urso December 6, 2012 at 12:11 pm

You can tip 10% (or 0%) but you have to type it in manually. The 20/25/30% buttons are preset.

I wonder to what extent this is offset by the drivers suddenly having to declare 100% of their tips for tax purposes. Hell, I wonder to what extent this is *explained* by the drivers suddenly having to declare 100% of their tips for tax purposes.

No Sleep Till December 6, 2012 at 2:59 pm

All of the credit card tips are reported on their wage statement remitted to the taxing authorities. Cab drivers themselves enter the amount of cash tips they receive based on a trust system.

PK Sully December 6, 2012 at 3:24 pm

Depending on their reported taxable income, this may be beneficial for them as the EIC is a negative income tax until (I think) the mid $40k’s for married couples with 2 kids. I’m a nosy fare; always talking to my cabbies– many have great immigration stories here in Chicago– and most do something else non-taxable on the side. I’ll be interested to see Uber’s effects. I love it. The cabbies seem reaction seems lukewarm.

Rahul December 6, 2012 at 3:39 pm

Does the IRS ever go after cabbies, waitresses, bartenders etc. for under-reporting cash tips? Why do people report any cash tips at all?

Micah December 6, 2012 at 3:47 pm

Maybe people report them because they are law abiding citizens? Strange, I know.

Nyongesa December 6, 2012 at 10:58 pm

Yes! The IRS has a formula, or set of formula’s they use to estimate what your take home was. The first thing the veteran servers expound upon during your first break is the many “IRS gotcha” stories that do the rounds.

Rahul December 7, 2012 at 3:08 am

So IRS calls and says, “No way you are such a bad server that you got tipped so low!”??

Gary Saturday December 6, 2012 at 12:08 pm

Driverless cars can’t get here fast enough!

Yancey Ward December 6, 2012 at 3:02 pm

You will be nudged into tipping them, too.

AADL December 6, 2012 at 12:15 pm

Now just abolish the rent grabbing Taxi and Limo Commission and the medallion system.

Andrew' December 6, 2012 at 12:28 pm

I’ll take that bet!

Foobarista December 6, 2012 at 5:39 pm

But wait! That’ll result in people charging whatever the market will bear, with all manner of vehicles able to be hired! And anyone will be able to drive a cab or limo. And if we’re not careful, we’ll have hired cars competing with busses, and possibly even using the same routes!

Can’t have that. We have to “protect” the citizens…

societax December 7, 2012 at 1:22 am

A proposal to extend medallion cabs to the boroughs other than Manhattan met with fierce resistance from the current medallion owners, who sued, claiming (in very simple terms) that it was unconstitutional to increase the number of medallions and that the value of their medallions would drop. Of course, the purpose of auctioning off these new medallions was to raise funds for the city.

Rahul December 6, 2012 at 12:18 pm

This is less a nudge and more sneaky User Interface design. I suspect many customers don’t even realize they can type in a tip manually. They probably assume that they must choose from these three presets or zero.

msgkings December 6, 2012 at 12:29 pm

That’s a valid nudge. Just like the opt-out 401k, many probably don’t even realize one of the deductions on their paycheck goes into an account for them and isn’t just another tax item. Or the menu that lists healthy stuff but allows you to order non-healthy versions not listed.

Dan in Euroland December 6, 2012 at 6:02 pm

How is this a ‘valid nudge’? Nudging is about systemic errors in reasoning. Asymmetric information is not an error in reasoning.

Derek I December 6, 2012 at 12:33 pm

+1, it’s less a nudge than a high-pressure tactic.

Matt December 6, 2012 at 12:59 pm

Don’t think it is a nudge – people taking taxis have already revealed that their opportunity cost of time is quite high – the difference between hitting a button and thinking about/typing in a different amount is non-negligible. So we’re presenting people with two quite different baskets – one with a low tip which takes more time, and one with a high tip which wastes less time.

Andrew' December 6, 2012 at 1:08 pm

The (meaningful) definition of a nudge is that it is in the interest of the person being nudged. Not just deemed good for them, that is just nanny-statism. It is something they would in fact voluntarily choose but for the hurdles to rationality of real life.

Nyongesa December 6, 2012 at 11:01 pm

How is it nanny-statism when the beneficiary is the cab driver and the taxi commission?

Todd December 6, 2012 at 1:21 pm

I think the upshot of the post is that the nudge was for the drivers, not the riders. They were the ones who fought the new system.

msgkings December 6, 2012 at 1:36 pm


Although it was more of a shove than a nudge for the drivers

Rahul December 6, 2012 at 12:37 pm

In any case Joshua Gross needs a math lesson. $144,146,165 seems a bogus estimate.

“And tips, which hovered around 10 percent when cab rides were cash only, averaged 22 percent on credit-card transactions this fall.”

Don’t we need to know what percent of all transactions were plastic?

Rahul December 6, 2012 at 1:32 pm

NYT says:

“At the end of last year, about one-fifth of cab rides were being paid for with a card.”

So a better estimate is ~$26 Million income increase via tips. Not $144 Million.

Though, it is reasonable that a higher proportion of plastic gets used on longer rides. So the $26 Million estimate might be a bit low; but the tip increase is definitely nowhere close to $146 Million as estimated by Joshua Gross.

Ricardo December 6, 2012 at 12:39 pm

No mention of marginal tax rates? Cash tips are (I’ve heard) frequently not reported as income, but credit card tips are. A $10 taxi ride with a $1 cash tip means $1 in the driver’s pocket. A $10 taxi ride with a $2 credit card tip means maybe $1.75 in the driver’s pocket. Add to that any phase-outs that occur because of the extra $2 in AGI and perhaps the $1.75 becomes $1.50. A person who was skeptical about government’s ability to spend money wisely might say that $0.50 of wealth has just been destroyed: we could have had $2 in cash floating around out there, but now we only have $1.50.

Bill December 6, 2012 at 1:33 pm

@Ricardo, your “skeptic about the government’s ability to spend money wisely” is apparently assuming that 100% of government spending is wasted. I would categorize such a person as an anarchist or conspiracy theorist.

Ricardo December 6, 2012 at 1:46 pm

I was generously assuming that it was only 100%, and that government is no worse than ZMP. Some would argue that government is NMP.

Jo Mama December 6, 2012 at 3:56 pm

You are an idiot. We should stop paying for defense and instead give your virgin butthole to Al Queda.

Ricardo December 6, 2012 at 4:16 pm

Thank you for your thoughtful reply.

anon December 6, 2012 at 12:58 pm

How obnoxious. If I were presented with these three ridiculously high pre-set values, I think I’d tip 0% just to be spiteful. Whereas normally I tip 15% for taxis.

Urso December 6, 2012 at 1:00 pm

Disagree that this is a “nudge.” “Nudge,” as Sunstein uses it, means subtly influencing people to do things *for their own good* (ie, 401ks) or at least *for the general good* (ie, organ donation). Here, the passengers are just being “nudged” to pay higher prices. This is clearly not in the benefit of the passenger, and I am unconvinced that increased tips to taxi drivers serve some higher societal purpose.

I agree with whoever posted that this is the effective equivalent of a high-pressure sales tactic, albeit a subtle one. Somewhat akin to grocery stores putting more expensive items at eye level.

dan1111 December 6, 2012 at 4:28 pm

High pressure? All you have to do is type in the number you want (or in the case of groceries, tilt your head slightly up or down).

Mike December 6, 2012 at 1:02 pm

Why is this a “nudge”? Based on what you’ve told us, the choice set has been reduced to four: 0, 20, 25 30. I thought “nudging” was about changing the default (but leaving the person free to make their originial choice — 10%, on average, according to your post). Here, you’ve taken the original choice off the table. So customers now gravitate to the next closest non-zero number. I don’t see how this vindicates the “behavioralist” explanation at all.

Jim December 6, 2012 at 1:14 pm

You can input any tip that you want including zero, all the button do is provide a preset way to make the tip of that size, thus this is a nudge.

Brian Donohue December 6, 2012 at 4:01 pm

The way Sunstein presents ‘Nudges’ in his book, the point is to nudge people to make decisions in their own interest (as others have argued.) That’s not what is happening here.

It’s more accurate to refer to this as an illustration of the power of anchoring/framing.

Marketing people have been employing tactics lke this for a long time. Based on the taxi example, it looks like a powerful means of affecting behavior.

At the end of the day, I’m thinking Uncle Sam comes out ahead, taxi passengers pay more, and taxi drivers’ post-tax income prolly reverts to something like its previous level, as wages are bid down/medallion prices are bid up.

JasonL December 6, 2012 at 2:29 pm

There’s a bit more to the dynamic. I’m more familiar with Boston as a visitor for business, where it goes like this:

- Cabs are required by law to accept credit cards and all cabs have swipe machines
- Drivers will drive you somewhere then suggest the card machine doesn’t work because a) they get hit for a percentage and b) there is a delay before they have hands on the payment (48 hours I think as of last year?)
- This interaction is profoundly uncomfortable, especially for business travellers.
- For their part, business travellers almost universally prefer to swipe because expensing random cash amounts is a PITA
- So, at the end of the ride there was a showdown with the customer feeling misled and less willing to tip and the cabby feeling and often expressing class discomfort where mostly better off people are too lazy to carry cash even if it helps the less fortunate immigrant driver out.
- Enter the machines that pre-select 20%, 30%, etc. instead of the 10% people were used to. The new equilibrium is the driver will announce some preference for cash or complain about hard times created by cards and the business traveller will be more than happy to hit the 20% button to quickly end the awkwardness and the company is taking care of the tip anyway.

jmo December 6, 2012 at 3:36 pm

In Boston it is illegal to operate a cab with a broken swipe machine. If they get you to your destination and say it’s broken – just remind them it was illegal to pick you up with a broken machine. If they raise a fuss call the police.

Max December 6, 2012 at 2:39 pm

But with cash payments they don’t have to pay taxes.

PK Sully December 6, 2012 at 3:33 pm

The EIC throws a monkey wrench into that at low income levels. Of course when you start phasing out EIC benefits, the effective tax rate shoots up. A tax system with inflection points in the marginal rate curve is ripe for fraud.

el December 6, 2012 at 4:14 pm

What I want to know is who was tipping low enough to make a 10% average? I’ve never tipped anything less than 15% on a cab ride >$10 in NY and that’s including when I was a broke college student. I guess I’ve been brainwashed into being a good tipper.

That said, my favorite taxi cab system (though not in terms of driving; god, they’re terrible drivers) is in Shanghai. You get a transport card, fill it up, tap the card on the touchless pad to pay when you arrive at your destination – no tip and the entire payment process takes literally under 5 seconds unless you want a receipt, which takes another 10 seconds to print out. Plus, you can use that transport card on the buses and the ever increasing number of subway lines. At some point, I’m sure you’ll be able to use it to pay for purchases in convenience stores like you already can in Japan.

JWatts December 7, 2012 at 7:45 pm

“What I want to know is who was tipping low enough to make a 10% average? ”

There are always people who don’t tip at all.

Totio Filipov December 6, 2012 at 4:29 pm

Even though cab drivers would have to pay taxes with those systems, I still believe it is better than cash. It is more conenient for the passengers as well.

iolanthe December 6, 2012 at 7:44 pm

Coming from a non tipping culture it had never really occurred to me to tip taxi drivers (we don’t in Australia although you’d normally round up the fare to the nearest convenient dollar unless it’s a business expense) but if I had it would have been 10%. Good thing I read this article before heading to Seppoland. Is there any service you don’t tip for? What would be the principal exceptions? Fast food places or do you tip there as well?

The Anonymouse December 7, 2012 at 6:08 am

I’m not sure there are any exceptions any more. The coffee cart where I work has a tip jar conspicuously displayed… at a place where you grab your own cup, then fill it and cap it yourself. Quite literally the only personal service received is the hand that is stuck out to take your payment.

I’ll tip a traditional amount in the traditional circumstances. But I would not be surprised if the servers and bellhops complaining about cheapskates are really dealing with the consequences of every damn person and their dog acting as though they deserve a gratuity.

Hazel Meade December 7, 2012 at 11:14 am

Similarly, technologies like Uber might result in better wages for actual cab drivers, since they would no longer be in hock to a cab company for the use of a medallion, which costs around $700,000. The medallion system may hold down supply but it doesn’t enrich the lowly drivers. It enriches the owners of the medallions, which are mostly held by large companies.

The Other Jim December 7, 2012 at 2:56 pm

It’s important that we bask in the idea that unionized workers in NYC balked at having a swipe machine in their cab… just because it made it harder to commit tax fraud.

It’s almost sublimely perfect, isn’t it?

Larry Siegel December 12, 2012 at 2:21 am

Taxi drivers were really, really stupid or misinformed to oppose credit cards. Practically everybody knows that people spend more when they can use a credit card.
The question “cui bono” always occurs to me in situations like this: if you want to know who is behind something, consider who stands to gain. The drivers are better off, the owners are better off, the credit card companies are better off, and the riders are better off. Who am I leaving out? Who is hurt by credit card use in cabs that might reasonably object to it? Somebody help me out here…

Larry Siegel December 12, 2012 at 2:23 am

The tax fraud argument (it’s the government that’s hurt) doesn’t cut it. With or without tips, most taxi drivers probably don’t owe any tax.

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