Is it wrong not to tip the cabbie?

Eventually, that tip to the cabbie accrues to the owner of the taxi medallion, whose value in New York has risen 15 percent a year for the past 70 years.

Every so often people become annoyed about tipping expectations, especially in New York. It is hard not to become annoyed because prices here are already so high relative to other parts of the country. And it is also often the case that service, regardless of what you do ex post, is perfunctory.

Why am I tipping the cab driver whom I shall not see again? I tip cabdrivers very small amounts because they really don’t do anything more than drive the cab. They are not especially careful drivers. Frequently, they don’t know where things are and you then must give them instructions. Furthermore, there are now all sorts of surcharges for evenings, rush hours, and even a tax to support the inefficiently-run mass transit system that I am not taking when I ride in a taxi.

The argument that tipping taxi drivers gives them an incentive to do a better job is vitiated to the extent that people tip a certain percentage automatically. In addition, many other service personnel are not tipped and they do a decent job. In New York we do not tip supermarket baggers and we get our groceries bagged just fine.

In general, an alternative to tipping is to go to another provider who’ll give better service.

Most of all, however, anything above the competitive “wage” goes to the owner of the medallion who may or may not be the cab driver. You don’t really know. (Only about 40% of medallions are owned by drivers, but not necessarily the one who is driving at any given time because the owners will lease the cabs to other drivers.)

I would really like to not tip taxi drivers at all. (And sometimes with bad service I do not.) But I often do simply because drivers sometimes say nasty things to you if they don’t get a tip. It is a failing of my psychological make-up to let that bother me.

Am I being selfish? After all, don’t they rely on tips to make a living?

First, I am not being selfish any more than the driver who wants a tip. The real issue is for me: Is this the best use of my money? Secondly, drivers do not rely on tips to make a living.

The market for cab drivers will settle on a competitive level of compensation. If tips are lower, their payments to the medallion owners will be lower. If the tips are higher, the medallion owners will get more. In either case, in equilibrium the drivers will get the same compensation.

It may be the case that the medallion owners will let the drivers benefit from differential tips to incentivize the drivers’ good behavior. But the automatic tip doesn’t count. It is only the discretionary tip – a relatively small amount, perhaps less than 5% of the fare – that would have that function. But I insist that even this is of minimal importance because drivers don’t provide much service.

Another way of looking at this is that if I do not value the marginally extra service a cab driver would give me if he received tips, then why should I pay for something I do not want?

It is true that when I — as one individual — do not give a tip the driver gets annoyed because at that point all of the payments to the medallion owner have already been set.

This is not really so important, however. If everyone were to act so as to reduce or not tip, this would be made up, to a very great extent, by the medallion owner in the longer run. (Not very long in calendar time because drivers would start quitting.)

But wouldn’t a reduction in tipping hurt medallion owners? Before you feel bad about them, consider this:

“As Wall Street still wobbles under the pressure of a weak economy, one New York asset class stands firmly on all four wheels. Taxi medallions — required licenses fastened to the hoods of all New York City yellow cabs — have rocketed in value at a time when many investments have plummeted. The average rate in July for a corporate-licensed taxi medallion in the Big Apple was a record $766,000 — up 126% from $339,000 in 2004.

“It is an industry that has always gone up,” says Andrew Murstein, president of Medallion Financial. “It has outperformed every index you can think of — the Dow, Nasdaq, gold, you name it.”

Over the past seventy years the price of a medallion has risen an average 15% per year! (This suggests an increasing relative scarcity of taxis.)

Furthermore, does the average person who takes a taxi think that contributing to this rise in medallion value is the best use of his marginal resources?

People ought not to confuse social customs (norms) and the discomfort caused by violating these with morality. You are not a bad person if you don’t tip taxi drives much or at all. Just be prepared to tell the voice in your head that it is wrong. And don’t let any possible cab-driver annoyance spoil your day.

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