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The Economic Value of Norm-Adherence and Menu Opt-Out Costs: Evidence from Tipping

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  • Donkor, Kwabena B.

    (Stanford Institute of Economic Policy)

Abstract

The trade-offs between private consumption versus social norm-adherence and choosing from a menu versus computing a preferred option affect nearly every decision-making process. I empirically analyze these trade-offs using passenger tipping data from 43 million New York City Yellow taxi trips. I estimate a model where tipping choices depend on people’s beliefs about the social norm tip, the shame from giving less (norm-deviation cost), and the opt-out (cognitive) cost of calculating a non-menu tip. I use the model’s structure to infer the unobserved population distribution of beliefs about the social norm tip and find that norm-deviation and opt-out cognitive costs are large relative to the taxi fare. I then analyze how norm-adherence and menus impact profits and consumer welfare.

Suggested Citation

  • Donkor, Kwabena B., 2021. "The Economic Value of Norm-Adherence and Menu Opt-Out Costs: Evidence from Tipping," Research Papers 3960, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3960
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    File URL: https://www.gsb.stanford.edu/faculty-research/working-papers/economic-value-norm-adherence-menu-opt-out-costs-evidence-tipping
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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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