Why Do We Tip Taxicab Drivers?

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. We propose two novel explanations of tipping that do fit the taxi case. The first is that tipping might represent Lindahl pricing of the services of vacant cabs (essentially, reduced waiting time), a local public good for taxi customers. The second is that the actual fare for a cruising cab is de facto a matter of negotiation between the cab driver and the customer. Tipping thus represents a frank acknowledgment that the posted fare or regulatory determined fare is nonbinding; the tip is simply the portion of the agreed fare in excess of the regulated one. JEL codes: D40, D82, L52, R48.