To insure prejudice: racial disparities in taxicab tipping.

• Author: Ayres, Ian

CONTENTS INTRODUCTION I. RACE AND THE HISTORY OF TIPPING II. DESCRIPTION OF DATA III. RESULTS A. Lower Tips for Minority Drivers B. Lower Tips by Minority Passengers C. Driver and Passenger Racial Intersections D. Regression Analysis IV. TESTS OF DRIVER "STATISTICAL DISCRIMINATION" INFERENCES A. Evidence of Driver Discrimination B. Tests of Statistical Discrimination V. ALTERNATIVE (NONRACIAL) HYPOTHESES A. Censored Data? B. Lower Tips for Minority Drivers C. Lower Tips by Minority Passengers VI. WHY ARE CONSUMERS DISCRIMINATING? VII. NORMATIVE IMPLICATIONS A. Adding Insult to Injury? B. Service Compris 1. Implementation 2. Reducing Driver Discrimination 3. Countervailing Effects CONCLUSION APPENDIX INTRODUCTION

It has become increasingly common to test whether sellers in retail markets discriminate against buyers. (1) But this Essay is one of the first efforts to test the other side of the market. (2) It examines whether retail consumers discriminate against sellers on the basis of the sellers' race. Even though Gary Becker long ago understood that consumers' "taste[] for discrimination" could cause sellers to discriminate against other customers (3)--for example, leading restaurant owners to maintain racially segregated lunch counters--almost no one has tested whether consumers' taste for discrimination might be directed at a seller's race itself (or the race of a seller's employees).

This failure to test is unjustified. Tests of consumer-side race discrimination are just as feasible as seller-side testing. Consumer price discrimination might be observed in car and house negotiations and auction markets (including online markets such as eBay). Of course, the ability of consumers to discriminate in terms of pricing is olden severely constrained. Outside of auction and negotiated-pricing regimes, consumers are generally presented with a fixed price.

But in virtually any market, there is the possibility that consumer willingness to contract is influenced by the race of the seller or the race of the seller's employees. (4) Audit procedures could easily be designed to test for disparate treatment by buyers with regard to refusals to deal. For example, prospective buyers at a real estate office could be randomly assigned to a white or minority sales agent and then tested to see whether a white agent is more likely to make a sale then a minority agent using the same sales pitch.

In this study, we have tested for consumer discrimination in taxicab tipping, because it is a dimension of consumer economic behavior that is both discretionary and potentially observable. In addition to illuminating this important area of economic behavior, we hope this study of tipping behavior will convince other researchers to test for consumer discrimination in other contexts--particularly regarding willingness to contract. The failure of civil rights advocates to undertake such studies leaves one side of every market interaction inappropriately unexamined and unregulated.

We collected data on more than 1000 tips to taxicab drivers in New Haven, Connecticut in 2001. After controlling for a host of other variables, we find two potential racial effects: (1) African-American cab drivers on average were tipped approximately one-third less than white cab drivers, and (2) African-American and Hispanic passengers tipped approximately one-half the amount of white passengers.

African-American passengers also seemed to participate in the racial discrimination against African-American drivers. While African-American passengers generally tipped less, on average they also tipped black drivers approximately one-third less than they tipped white drivers.

The propensity to "stiff'--by which we mean to leave no tip--was particularly racialized. African-American drivers were 80% more likely to be stiffed than white drivers (28.3% versus 15.7%). And African-American passengers were almost four times more likely than white passengers to leave no tip at all (39.2% versus 10.6%).

Because we do not observe (and hence cannot accurately control for) passenger wealth or income, it is possible that passenger poverty instead of race may be driving this result. But cab drivers cannot directly observe passenger wealth either. They can only infer the amount of a prospective tip based on visible characteristics, like passenger demographics, and transactional factors, like weather, pickup location, etc. Thus, our finding that African-American and Hispanic passengers tend to tip less can be interpreted as an estimate of the inferences that would be made by a driver who was a "statistical discriminator."

Our limited data allow us to estimate what kind of statistical inferences a cab driver could make about the size of the likely tip and fare given the observable characteristics of passengers. This Essay cashes out the inferences that a retail seller would make about its potential customers. Our "statistical discrimination" regressions suggest that "rational" drivers might expect to earn a 56.5% lower tip from an African-American passenger than from a white passenger (after controlling for a host of nonracial observable characteristics). Overall, a driver in our data should have expected about 9% less revenue when stopping to pick up an African-American passenger (relative to a white passenger).

This result has policy relevance because such driver inferences may play a role in the well-documented tendency of drivers to refuse to pick up minority passengers. (5) The data suggest that at least a portion of driver-side discrimination may be caused neither by animus nor by (rational or irrational) statistical inferences about crime but instead by inferences about how much passengers of different races are likely to tip. Indeed, we show that this revenue effect is orders of magnitude greater than any rational inferences that might be made about the propensities of passengers of different races to rob cab drivers.

Several caveats, however, are in order before accepting these interpretations of the data. First, the data were based on cab drivers' reports. Cab drivers' racial stereotypes or preconceptions may have led them to systematically underreport black-passenger (or overreport white-passenger) tips. Second, we do not have strong controls for driver quality. Lower tips by African-American passengers might be explained by a general tendency of passengers to give lower tips for poorer service, coupled with drivers providing inferior service to African-American passengers. We respond to these (and other) alternative hypotheses below by bringing to bear additional pieces of evidence.

If we tentatively accept the finding of customer discrimination against African-American drivers, it is natural to ask, "Why?" The data are not well suited to answer this question, but they do contain some clues. For example, the higher propensity of passengers to stiff black drivers seems more consistent with a theory of conscious decisionmaking. Because driver allocation was more or less random, this passenger discrimination cannot be driven simply by the existence of some passengers who never tip. Rather, there seem to be passengers who are more likely to decide not to tip African-American drivers.

In contrast, another portion of the overall driver disparity may more likely reflect unconscious disparate treatment. Passengers tend to round up their tips (to the nearest dollar above their target level) more often when tipping white drivers than when tipping black drivers (32.3% versus 24.0%). (6) When confronted with a last-second decision (based on the final fare) about whether to round up or round down, even passengers who believe they are hardwired fifteen-percent tippers may in practice unconsciously allow the driver's race to impact their rounding decision. (7) When we decompose the overall racial disparity in tips received, we find that racial disparities in stiffing and rounding account respectively for about 27% and 36% of the overall disparity.

The word "TIP" is thought by some to have originated in British pubs, where signs with just these three letters were posted on boxes as a reminder that gratuities were welcome; the letters were an acronym for the phrase "To Insure Promptness." (8) But the evidence from this Essay is suggestive of a new acronym: "To Insure Prejudice." Tipping may facilitate prejudice in two different ways: (1) It allows customers to discriminate against minority drivers, and (2) it gives cab drivers a revenue-based incentive to refuse to pick up minority passengers.

Our two core findings give rise to a single normative implication: Government-mandated tipping (via a "Tip Included" decal prominently posted in cabs) might be used to reduce two different types of disparate racial treatment. First, mandated tipping would directly reduce the passenger discrimination against black drivers documented in this study. Second, mandated tipping might indirectly reduce the tendency of drivers to refuse to pick up black passengers--at least to the extent that this driver discrimination is caused by statistical inferences about differences in tipping.

There are, however, at least two reasons to pause before eliminating discretionary tipping. First, although research suggests that tips are not strongly correlated with quality of service, tipping (at least in theory) may induce better service. Second, poorer individuals, whose rides are currently subsidized by passengers who tip more, will be less able to afford the increased fares under a mandatory tipping regime. (To the extent that minority individuals tend to be less wealthy, this shift would have a disparate racial impact.)

The body of this Essay is divided into seven Parts. Part I briefly reviews the role of race in the history of tipping in the United States. Part II describes the data collected for this study. Part III presents the core results--highlighting both the racial and the nonracial determinants of...