Tipping the Uber Driver

I wrote something here not long ago about the practice of tipping a barber -- at least, my barber. I didn't mean much by it except as a filler anecdote for a day when nothing very profound occurred to me.

But the wonderful blog Marginal Revolution has got me thinking that there IS something important to consider about the practice of tipping people in service businesses with low barriers to entry.

Consider, with MR, the Uber driver who typically has a tip jar. Through the app you are paying Uber, which is paying him, and through the tip jar you can pay him directly. Now: does the practice of the tip jar affect his income?

In the traditional model, assuming perfect competition, etc., the answer is clearly "no." After all, assume it did. Assume, then, that the drivers started making more money per trip by making tip jars available. Word would get out, the business of becoming an Uber driver would be more appealing, and more people would do it. That would mean more drivers per willing passengers. But that in turn would mean there wouldn't be enough passengers to keep all the drivers busy, so although the drivers would still be getting more PER PASSENGER, they'd be spending more time waiting around to find one. And THAT would mean their total income would be unaffected. QED.

The actual conditions of that market approach the textbook conditions of classical 'perfect competition' quite well. After all, just about anyone with a decent car and a license to drive it can enter the market at will, There is no need for a taxicab medallion. And there is no obvious mechanism by which information can be quarantined! The drivers will naturally talk to friends and family about how their Uber work is going, so the market will know when above-normal profits are available.

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