Why Do We Tip Taxicab Drivers?

Abstract

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. I propose a novel explanation for tipping that does fit the taxi case. It is that tipping amounts to Lindahl pricing of the services of vacant cabs (essentially, reduced waiting time), a local public good for taxi customers.