The Uber Tipping Equilibrium

by on November 17, 2017 at 7:50 am in Economics | Permalink

What is the effect of tipping on the take-home pay of Uber drivers? Economic theory offers a clear answer. Tipping has no effect on take home pay. The supply of Uber driver-hours is very elastic. Drivers can easily work more hours when the payment per ride increases and since every person with a decent car is a potential Uber driver it’s also easy for the number of drivers to expand when payments increase. As a good approximation, we can think of the supply of driver-hours as being perfectly elastic at a fixed market wage. What this means is that take home pay must stay constant even when tipping increases.

But how is the equilibrium maintained? One possibility is that as riders tip more, Uber can reduce fares so that the net hourly wage remains constant. Since take home pay doesn’t change we will have just as many drivers as before tipping. Under the tipping equilibrium the only change will be that instead of the riders paying Uber and then Uber paying the drivers, the riders will also pay something to the drivers directly and Uber will pay the drivers a little bit less. The drivers end up with the same take home pay.

But suppose that Uber doesn’t want to reduce fares or is somehow constrained from doing so. Does the model break down? Sorry, but the laws and supply and demand cannot be so easily ignored. If Uber holds fares constant, the higher net wage (tips plus fares) will attract more drivers but as the number of drivers increases their probability of finding a rider will fall. The drivers will earn more when driving but spend less time driving and more time idling. In other words, tipping will increase the “driving wage,” but reduce paid driving-time until the net hourly wage is pushed back down to the market wage.

At this point many readers will object that I am a horrible person and this is all theory using unrealistic “Econ 101” assumptions of perfectly competitive markets, rationality, full information etc etc. To which my response is that the first claim is plausible but irrelevant while the second is false. A new paper, Labor Market Equilibration: Evidence from Uber, from John Horton at NYU-Stern and Jonathan Hall and Daniel Knoepfle, two economists at Uber, looks at what happens when Uber increases base fares:

We find that when Uber raises the base fare
in a city, the driver hourly earnings rate rises immediately, but then begins
to decline shortly thereafter. After about 8 weeks, there is no detectable
difference in the average hourly earnings rate compared to before the fare
increase. With a higher fare, drivers earn more when driving passengers, and
so how do drivers make the same amount per hour? The main reason is that
driver utilization falls; drivers spend a smaller fraction of their working hours
on trips with paying passengers when fares are higher.

My conclusion is that increases in Uber fares are a very bad idea. Why? Increases in Uber fares–i.e. increases beyond those required to have enough drivers so that pick-up times are reasonably short–have two negative effects. First, and most obviously, higher fares increase the price to riders. Second, higher fares don’t result in higher driver earnings but do result in drivers wasting time.

The situation is very similar to the inefficient market for realtors. When realtors earn a fixed percentage of a home’s sales price, higher home prices encourage more entry into the realtor market. But we don’t need more realtors just because home prices have increased! When home prices are high, a realtor can earn enough selling a handful of homes a year to make it worthwhile to stay in the industry even though most of the realtor’s time is spent unproductively finding customers rather than actually helping customers to buy and sell homes. It would be better if commission rates fell when home prices rose but even after many years of online entry that typically doesn’t happen which is the mystery of realtor rent-seeking.

Uber is a great service for riders and it’s also great for people who need a source of flexible earnings. The fact that Uber drivers earn less than some people think is appropriate is a function of the wider job market and not of Uber policy. Indeed, Uber can’t increase take-home pay by raising fares and if we require them to do so we will simply hurt consumers and waste resources without improving the welfare of drivers.

The Berkshire Museum, yes.  They were going to sell 40 paintings at Sotheby’s, including two very special Norman Rockwells, but at the last minute a court decision halted the sale, claiming (with only thin justification) that the sale would violate the museum’s trusts.  That is the setting of my latest Bloomberg column, here is one bit:

The sad truth is that the people running the Berkshire Museum just don’t care that much about American art any more, at least not from an institutional point of view. Given that reality, it’s actually better if they are not entrusted with important artworks.

The court’s decision now means it will be hard to pull off the sale with fully clear rights to the titles, although the court’s judgment will be re-examined in December. Both the uncertainty and the surrounding negative publicity will scare off buyers and may spoil the market for a long time to come.

There is much more at the link.  The argument against selling, of course, is that in a world of frequent sales all museums will find it hard to make credibly binding commitments to their donors, who often do not want their donated works recycled in the marketplace.  But the equilibrium of zero selling is one that will destroy a great deal of value in the art world.  Note that this problem will become increasingly relevant as the clock ticks and the number and inappropriateness of past museum commitments piles up.  If nothing else, sooner or later insolvency sets in.  Rust never sleeps.  And so on.

Should churches really own all that land in the downturns of major American cities?

It is in the new issue of the Times Literary Supplement (a wonderful periodical of course), right now this link is ungated, for how long I do not know.  I thought the book was very well-written and especially impressively researched.  But on the side of economics and conceptual framework, I found it too biased.  Here is one excerpt from my review:

In a book with almost 400 pages of text, it is striking that government fraud is not seriously discussed, with the exception of the critical take on the Comstock movement, under which the Post Office took up a moral crusade against mail fraud, directed by the evangelical Anthony Comstock. Yet if consumers are so impetuous and ill-informed as to be frequent victims of business fraud, might not voters and even activist citizens be prone to similar manipulations? Balleisen mentions that such a view was held by the nineteenth-century Spencerian Edward Youmans, but he doesn’t do much more than mock it and then move on. Yet arguably the biggest fraud of the early part of the twentieth century was the selling of the First World War to the American public on mostly false pretences. Progressives led this sales pitch, through spokesmen such as Herbert Croly, and of course the President Woodrow Wilson, telling the American people that war was a noble cause that would revitalize the nation and save the world.

In Balleisen’s narrative, however, the Progressives show up only as critics of fraud.

And is corporate fraud really going up these days?:

Take lives lost in the workplace. An employer more or less promises that a job is relatively safe, and if it turns out to be dangerous that may reflect a kind of fraud or at the very least a major disappointment. Yet jobs in America have never been as safe as today, and furthermore the rate at which job safety increases does not seem to have been affected by the creation of the Occupational Safety and Hazard Administration (OSHA). Or what about food poisoning, which you also might take as a sign of a fraudulent transaction? Again, overall, the opportunity to buy truly transparently safe food supplies seems greater than ever before, notwithstanding the fact that more consumers are voluntarily taking chances with sushi, non-pasteurized cheeses and home-made raw milk. The nice thing about mortality statistics is that a death pretty much always reflects a disappointment with the transaction, but for most metrics (opioid markets being one significant exception) mortality is down over the past few decades.

Do read the whole thing.

Here is the transcript and podcast, I enjoyed this chat very much.  Here is part of the opening summary:

Sujatha Gidla was an untouchable in India, but moved to the United States at the age of 26 and is now the first Indian woman to be employed as a conductor on the New York City Subway. In her memoir Ants Among Elephants, she explores the antiquities of her mother, her uncles, and other members of her family against modern India’s landscape.

Our conversation considered the nature and persistence of caste, gender issues in India, her time as a revolutionary, New York City lifestyle and neighborhoods and dining, religion, living in America versus living in India, Bob Dylan and Dalit music, American identity politics, the nature of Marxism, Halldor Laxness, and why she left her job at the Bank of New York to become a New York City subway conductor, among other topics.

Here is one sequence:

GIDLA: Actually, the only relation I have with my family members is political views.


GIDLA: If we have to connect on familial links, we will always be fighting and killing each other. All that we talk about with my mother is politics and untouchability and caste and Modi and things like that.

It’s the same thing with my sister also. This is where we connect. Otherwise, we are like enemies. My brother, we’re completely alienated from each other, firstly because he goes to church now. We never used to go to church before. He’s into this Iacocca. Is there a name . . . ?

COWEN: Iacocca?

GIDLA: Yeah.

COWEN: Lee Iacocca?

GIDLA: Yeah.

COWEN: The former Chrysler chairman?

GIDLA: Yeah. He reads that kind of books.

COWEN: Management books.

GIDLA: He’s into that kind of stuff.

COWEN: You don’t?


GIDLA: He read Freakonomics and he liked it. I don’t relate to that stuff.

And this toward the end:

COWEN: Your most touching memory of your mother?

GIDLA: I don’t know. When I was arrested, she was very worried. She said, “I wish I could take you back into my womb.”

Strongly recommended.  I was pleased to see that Publisher’s Weekly named Sujatha Gidla’s book as one of the ten best of 2017, you can order it here.

Gifts of the Immigrants, Woes of the Natives: Lessons from the Age of Mass Migration (2017). JOB MARKET PAPER
Abstract: In this paper, I show that political opposition to immigration can arise even when immigrants bring significant economic prosperity to receiving areas. I exploit exogenous variation in European immigration to US cities between 1910 and 1930 induced by World War I and the Immigration Acts of the 1920s, and instrument immigrants’ location decision relying on pre-existing settlement patterns. Immigration increased natives’ employment and occupational standing, and fostered industrial production and capital utilization. However, it lowered tax rates, public spending, and the pro-immigration party’s (i.e., Democrats) vote share. The inflow of immigrants was also associated with the election of more conservative representatives, and with rising support for anti-immigration legislation. I provide evidence that political backlash was increasing in the cultural distance between immigrants and natives, suggesting that diversity might be economically beneficial but politically hard to manage.

That is from Marco Tabellini, job market candidate at MIT.

…sons crowd out human capital acquisition by daughters.  If all daughters of self-employed men experienced the “sisters-only” level of transmission, the overall gender gap in self-employment would be reduced by nearly 20 percent.

That is from Elizabeth Mishkin, on the job market from Harvard.

While we are on related topics:

I establish that women in U.S. counties with heavier casualties were more active in starting new businesses after the war [WWII] ended and this difference persists to this day. I also find that single women were more likely to start new businesses than war widows. Evidence in favor of the marriage market channel suggests that reducing opportunity cost is more effective in encouraging women to start new businesses than merely providing financial subsidies.

That is from Patrick Luo, also on the job market from Harvard.

Seasteading, the once quixotic idea of Patri Friedman and early funder Peter Thiel, is now taking shape in French Polynesia writes David Gelles in the New York Times:

Long the stuff of science fiction, so-called “seasteading” has in recent years matured from pure fantasy into something approaching reality, and there are now companies, academics, architects and even a government working together on a prototype by 2020.

…Earlier this year, the government of French Polynesia agreed to let the Seasteading Institute begin testing in its waters. Construction could begin soon, and the first floating buildings — the nucleus of a city — might be inhabitable in just a few years.

“If you could have a floating city, it would essentially be a start-up country,” said Joe Quirk, president of the Seasteading Institute. “We can create a huge diversity of governments for a huge diversity of people.”

The future is hard to predict but I am eager to see greater experimentation in city governing rules.

Addendum: I have been a minor adviser.

The dystopia of Malcolm Harris

by on November 14, 2017 at 1:56 am in Books, Economics, Education | Permalink

He is the author of the new and interesting Kids These Days: Human Capital and the Making of Millennials.  Most of the book is about millennials as the generation that invests in itself.  Towards the end he lays out a somewhat separate discussion of what a future dystopia might look like, I am very briefly summarizing his seven points, noting that some of the headings are my rewordings:

1. The equitization of human capital.  This will start out as “win-win” transactions, but eventually will become “subprime human capital.”

2. The professionalization of childhood.  Kids will start preparing for fairly specific and very locked-in careers at quite young ages, and find it difficult to deviate later on.

3. “Climate privilege.”  The ability to live somewhere insulated from most of the costs of climate change will become a major marker of class and privilege.

4. Discrimination by algorithm.

5. “The Malfunctioning.”  “America will need institutions for people who just can’t make it….I don’t think this will be “funemployment” of a guaranteed minimum income.  It’s more likely to be an unholy combination of mental asylum and work camp.”

6. Misogynist backlash.

7. Fully tracked.  The “data self” will increasingly approach the “real self.”

Worth a ponder.


Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income—most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century.

That is from a new paper by Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, via the excellent Kevin Lewis.

Mandatory parking requirements, sidewalks, curb cuts, fire lanes, on site stormwater management, handicapped accessibility, draught tolerant native plantings… It’s a very long list that totaled $340,000 worth of work. They only paid $245,000 for the entire property. And that’s before they even started bringing the building itself up to code for their intended use. Guess what? They decided not to open the bakery or brewery. Big surprise.

Here is much more, from Johnny at Granola Shotgun, one of the best pieces of the year, with superb photos, lovely twists and turns in the narrative, hat tip goes to Anecdotal.

Here are all posts by Johnny, “I’m an amateur architecture buff with a passionate interest in where and how we all live and occupy the landscape, from small rural towns to skyscrapers and everything in between. I travel often, conduct interviews with people of interest, and gather photos and video of places worth talking about. The good, the bad, and the ugly – it’s all fascinating to me.” — a new master of the medium.

Tyler and I are always pleased to get emails like this:

Dear Prof Alex and Prof Tyler,

I write to express my profound gratitude to you and your team for putting those videos online for the benefit of mankind. I am currently running an Executive MBA at University of Ibadan School of Business in Nigeria. Your videos have been extremely useful to me and lots of my colleagues. Exam comes up tomorrow. I am revising with your videos again. Everything is made simple, easy to understand, remember and apply. I look forward to sharing my exam success story with you in addition to applying the principles to a personal business in the nearest future.

I can’t thank you enough.

Ibrahim HAMMED

And here are two from teachers of economics at high schools in the United States:

Dear Profs,

I’m an Economics teacher at a public charter school in Mesa, Arizona. I use your videos in my class on a regular basis. My students and I love you. Thank you for all that you do!

Ben Fenton


As a high school Economics teacher, I am constantly trying to make lessons interesting and relevant. Your video series is a terrific resource and I am thankful you have invested your time and resources into making these interesting, understandable, and relevant videos. Please pass along my thanks to anyone associated with your very useful site.

Many thanks,

Bruce Jones, Economics Teacher, Hiram High School

Won’t Get Foiled Again

by on November 11, 2017 at 7:23 am in Current Affairs, Economics | Permalink

The Trump administration has just put crippling tariffs (97-162%) on the import of aluminium foil from China. Making America great again? It’s doubtful. Far more American firms use aluminium foil than make it. Indeed, only two US-based firms make it and one of them is owned by Swedes. Virginia Postrel has the details:

Only two companies have U.S. mills making the thin-gauge foil affected by the duties. The ones owned by Sweden-based Gränges are already selling all they can produce; the company has announced plans to expand capacity at its Tennessee mill by 2019. Converters say that JW Aluminum Co., the Mt. Holly, South Carolina-based company that lobbied strongly for the duties, isn’t offering them much, if any, additional supply.

Most of the ex-Chinese sales won’t even go to US firms but to firms in countries not affected by the tariffs, including Russia, Bulgaria, South Korea and Taiwan. Yes, Russia.

Conspiracy or coincidence? I want to say coincidence. On the other hand:

Donald Trump’s former national security adviser, Michael Flynn, is under investigation for involvement in an alleged plot to kidnap a Turkish dissident cleric living in the US and fly him to an island prison in Turkey in return for $15m, it was reported on Friday.

So who can say anymore? Excuse me while I go put on my hat.

My view is not exactly that of Bryan’s, but this will be one of the most interesting and important books of the year, pre-order it here.

Here is Bryan on the book.

I am now giving this a chance of somewhat over 50 (!) percent, and that is the topic of my latest Bloomberg column.  Here is one bit:

Gross domestic product growth for the last two quarters was over 3 percent, even in light of hurricane damage in August and September, and middle-class income growth has resumed. You might think that would mean high price inflation from credit growth and “overheating,” but the 12-month change in core prices for personal consumption expenditures has fallen to 1.3 percent.


Low rates of inflation, however, reflect productivity gains that already are here. The tech giants — Google, Inc., Facebook Inc. and Apple Inc. — have become major managers of our information, our businesses and our lives. They’re meeting political resistance, but whatever you think of those complaints, they are signs the major tech companies are having transformative effects. I used to say that we are overrating what tech has done for us to date, and underrating what it will do in the future. Perhaps reality has caught up with that prognostication.


The major tech companies are growing their platforms quickly, supporting low prices with scale, product diversity, data ownership and superior service. Hardly anyone today worries about the eventual disappearance of competition and monopoly prices from Amazon or the other major tech companies. Do you really think Amazon is going to double book prices five years from now?…The tech companies have shown that their radical model of low price, high market share, high quality rapid expansion will keep them profitable for a long time to come.

Big if true, as they say…do read the whole thing.  The still-remaining negative possibility, of course, is that the current positive wave is like 1995-1998, and we will sink back to less positive economic times, as we did back then.

Room charges at the Ritz?

by on November 8, 2017 at 11:12 am in Current Affairs, Economics, Law | Permalink

The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter.

Several prominent businessmen are among those who have been arrested in the days since Saudi authorities launched the crackdown on Saturday, by detaining more than 60 princes, officials and other prominent Saudis, according to those people and others.

The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of “persons of interest” and said the move is “in response to the Attorney General’s request pending the legal cases against them.”

Here is the WSJ piece, note that many of these people are being held at the Ritz-Carlton hotel in Riyadh, now being used as a kind of high-class detention center.