Taxi Tipping and the Principal-Agent Problem

(Photo: Spider.Dog)

A reader named Matt Hasten writes in to say:

While in Las Vegas last week for a convention, I took a taxi between casinos (might as well see a few while making my contribution). When it came time to pay and I pulled out a credit card, the cab driver informed me that using a credit card would mean paying a $3 fee in addition to the fare ($11.50). This struck me as a ridiculously high surcharge and when it came time to tip the cab driver (all of this using the back seat electronic card reader), I did not add anything extra. My logic was that while I usually tip 20% on cab fare, that would have only been $2.30 and I already was paying $3 above the fare.

I explained to the cab driver that the money I would usually spend tipping him was instead paying for the $3 fee the cab company imposed on me. The cab driver, understandably, saw things differently and had some colorful wishes for the remainder of my evening. At the time, I felt justified not tipping because I felt the only way to make my displeasure known about the fee was to stiff the cab driver and hope his (and other cab drivers’) anger of missing out on tips might put pressure on the cab company to change the policy. In hindsight, I do feel bad about stiffing the driver! I’m the kind of guy where you have to really mess up to earn less than a 20% tip at a restaurant.

I know the driver didn’t set the $3 credit card fee, but taking it out on him by not tipping was the only way I saw to make my displeasure known or, better yet, impact a greedy policy.

Was I right to not tip?

Interesting question. But, Matt, you’re asking us if you were “right”? By now you should know that Freakonomics is not very strong in the right-vs.-wrong department :-)

Anyway: I can see Matt’s point of view. I can also see the driver’s point of view. As Matt further noted, the $3 surcharge has been controversial for a while in that it seems to be a back-door profit center for the cab companies, with much of the money not going to the credit-card companies (or the drivers) but rather to the cab companies themselves. From a 2011 Sun article:

Credit card companies said they were unaware of the surcharge until recently, when the politically active taxicab companies began pushing for the bill’s passage.

The Assembly approved the bill earlier this session with minimal opposition. But it is beginning to draw some resistance.

“It’s exorbitant,” said Michael Hillerby, a lobbyist hired by MasterCard. “Nothing we’ve seen justifies that charge.”

William Uffelman, president and CEO of the Nevada Bankers Association, said: “There’s good public policy, then there’s self-serving efforts. This is a self-serving effort.”

The average Las Vegas cab fare last year was $13.52, according to the authority. The $3 fee works out to an average 22 percent surcharge.

But let’s get back to Matt’s situation. Indeed it is tricky. Why? Because he has encountered what economists call the “principal-agent problem.” This means that two parties who seemingly have aligned incentives in fact do not. In this case, the cab company (the principal) would like the driver (the agent) to carry out a strategy that works well for the company, but the driver finds that such a strategy goes against his own interests.

We offered an example of this problem in SuperFreakonomics: city officials and police bosses would like street cops to crack down on prostitution but in fact the cops themselves didn’t have a very strong incentive to do so — which is why, as a Levitt-Venkatesh study showed, “a prostitute [in Chicago] is more likely to have sex with a police officer than to get officially arrested by one.”

While Matt’s reasoning makes sense — “I know the driver didn’t set the $3 credit card fee, but taking it out on him by not tipping was the only way I saw to make my displeasure known or, better yet, impact a greedy policy” — from his point of view, of course it doesn’t help the driver, who’s getting squeezed between the customer and the company.

What would you do if you were Matt?

One thought: suggest to the driver that he set up his smartphone to take credit-card payments, cutting out the cab-company middleman.

Better ideas?


Tip him what you think is fair. You aren't his mother, it isn't your job to protect him in the world.


This also illustrates why mandatory/expected tipping is a terrible practice — the customer has the ability to greatly influence the worker's compensation due to reasons that are arbitrary or outright at odds with the performance of the worker.


This is against the vendor's agreement with most (all?) of the credit card companies; they can offer a discount for paying cash but not a penalty (or minimum charge) for using a card. I'm surprised Visa/MC didn't rescind the companies' ability to accept their cards.

Minimum charges or issues with credit cards are common in New York. Whenever I encounter minimum charges at places where the average purchase is likely to be low, like a bodega or bagel shop, I usually respond by not giving them my business anymore. Either don't take cards at all or take them for any purchase. As a customer, I should have the right to pay in a manner convenient to me.

The problem is that every cab company in Vegas sees they can get away with this, so they all do it, so there's no way for their customers to escape it. Even if one or two companies decided to not charge, you can't really set up a ride with one of them if you're just in the taxi line at a casino. Maybe they need to go NYC-style and centralize and control fares to avoid this kind of gouging.


Mike B

Due to a recent DOJ anti-trust settlement neither Visa or Mastercard can ban merchants from setting minimums or charging a higher price for credit card use. Some states like NY prohibit such practices, but most do not. Hopefully states will catch on because when customers are encouraged to use cash the state will usually never see a dime of tax from those invisible transactions.


Ah! That explains it. It's seriously irritating, because who carries cash anymore? Then I have to deal with change, etc. Much easier (and faster!) to swipe a card, especially when it's under $25 and I don't even have to sign. If I have to stand behind one more person digging through a coin purse...

And yes, I'm aware this is a prime example of a First World Problem.


pay cash - and tip the driver -

Mike B

Who carries cash any more? The sad part is that before recent legislation and a DOJ anti-trust settlements you could complain about this sort of thing to the credit card company and the credit card company would suspend the merchant's account as use fees and minimum charges used to violate the vendor agreement.


Who carries cash any more? A whole lot of people, that's who. Maybe some of you who've lived all your lives on the upper rungs of the economy can get away with not carrying cash. Maybe you've even come to think of it as normal, but that's just a reflection of your own cultural isolation.

Indeed, even on my own current fairly high rung, the only reason I don't pay cash for a lot of in-person transactions is that I have a cash-back rewards card.

Mike B

There are all sorts of better reasons not to tip the driver than just an unfair surcharge. The whole American concept of "mandatory" tipping is bizarre. What was probably originally meant as either a reward for good service or straight payment for service has morphed into a cross between a mechanism for extortion and a mechanism for revenge. In this case it was being used as the latter, striking back against an unfair system and rightly so I might add, but why are people every day expected to pay above and beyond the listed price of a service when that service is anything but "bad"? I know workers who get tips often needs those tips to get either a living wage or even minimum wage, but why can't the fair cost of labor be factored into the cost of the service like it is in the majority of retail establishments? I went to Europe recently and it was so refreshing not to be required to tip, even if at the end of the day the bill was the same with a service charge. I would love to do the same in this country, but here such an action is likely to be met with some sort of reprisal.


RJ Roy

I would argue that your experience in Europe was truely mandatory tipping, as you are charged automatically a set percentage, with no choice in the matter. While North American society pushes one to tip all the time, it is not required.

The North American setup for tipping ostensibly provides an incentive to provide high quality service, as your income is directly related to how the customer felt about the service. Conversely, the European setup offers no such incentive; you get your X% regardless of whether you provided service fit for a king, or whether you tossed the food all over the customer.

That said, I never had bad service the few times I was in a European restaurant, so I don't know how well the incentive (or lack thereof) really works.


I suspect the incentive lies on the back end in European restaurants - if you get too many complaints (and that's probably not very many) you are fired and good luck finding your next job.


At the risk of sounding glib, I would carry cash.

You can get discounts by paying cab fares in cash. For example, for a $20 metered fare, drivers will often accept $17 in cash rather than $20+tip on a credit card.

A cab company (not in Vegas) tried to hit me with a surcharge one time. I had the receipt for the fare, they added $5 or so because of a "minimum" that was not advertised. I disputed and won.

But why are people surprised when LV finds another way to screw them out of their money?


In my experience most cab drivers will take you past a cash machine / ATM and wait free of charge if you explain it's to get cash for a tip. They know the CC system doesn't work out well for them or the customer better than anyone.


...where I have to pay an ATM fee and, depending on how sketchy the ATM is, risk compromised banking data.

They did some surveying in NYC after credit card readers were implemented, and actually drivers reported that people tipped significantly *more* on credit cards. Enough to offset the extra fees, even. By offering 15-25% amounts onscreen, and taking cards, I don't have to round and make it an even dollar (in which case I'm never going to round in favor of the cabbie). It's a nudge to tip more. It also means cabbies have to carry less cash, which is safer for them.


It would be interesting to see whether the card itself encourages larger tips, or whether people who carry cash generally tip less. I could see both being true....

Cor Aquilonis

Rule for Living: If you can't afford to tip, than you can't have the service. The tip is part of the cost of doing business.

Also, it's not cool to stiff the driver so you can have the "convenience" of paying by credit card. Not cool at all.

Mike B

No, a tip is OPTIONAL, else it would be called a service charge. Someone cannot be charged with theft or sent a bill for not paying a tip. If a tip is in fact mandatory then it should be added to the official cost of a service.

Cor Aquilonis


Is this also how you operate at restaurants?

Eric M. Jones.

You should have tipped the driver if he gave you good service otherwise. He didn't make up the rule.

BTW: In my business, I see more and more businesses NOT taking credit cards at all (and my credit score is 795). They want bank transfers or cash--which is worrisome because the last guy who insisted on cash only was selling things out of the trunk of his car in a parking lot.

Mike B

What constitutes "good service"? In North America the threshold for giving a tip is almost always "not bad service". Giving someone a tip for simply doing their job defeats the whole purpose behind a tip. If I on the other hand need to get to the airport to catch my flight and the driver goes above and beyond to get me there, then that driver is worthy of a tip. My experience in cabs is that most drivers will do whatever they can to milk the meter including taking round about routes or drawling to get stuck at lights to build up the "stopped or slow moving traffic" charges.

Thanks, but no thanks. I'd rather walk.


The only time I pay for a taxi/car service with a CC (and pay the add-on card fee) is when I travel for work and get reimbursed. So long as the charge is within bounds of my company's reimbursement policy, I don't spend too much time analyzing the cost/benefit of a couple dollars here or there. I opine this is typical business traveler behavior. The existence and possible prevalence of this type consumer would make the CC fee a smart market segregation mechanism. Charge more for those willing to pay it.


How about carrying a $20 in case you need cash?


Isn't the underlying problem lack of competition and near monomopies in the credit card market as well as that of licensed taxis for that matter? The consumer never gets a good deal in the absence of market competition.

Mike B

No, in this case the credit card duopoly actually aided consumers at the expense of merchants.


Yes, I'm sure Achmed went back to the dispatch station, yelled at the present day equivalent of Danny Devito, started a revolt with Judd Hirsch, and the policy got changed. That was sarcasm.

Tips are for the person providing the direct service -- TIP, To Inspire Promptness, To Improve Performance, etc.

If you want to find reasons out of the servers' power to cheap out on a tip, you can probably do it at every restaurant. The chicken was tough, a bottle of wine was corked, you waited too long, etc.

Did the cabby take the most direct route? Stop at a safe and convenient place? Not scare the hell out of you swerving through traffic? Was silent if not uncurt at least?

It is some poor guying trying to make the rent hacking. The fact that you were driving between casinos blowing money at house odds makes your economic judgment even more hypocritical.


Have companies pay people a living wage and remove this unnecessary and arbitrary system where works feel their salary should be topped up by customers.

How long before bank tellers have tip cups at their desk as you do your banking?


Ah, the Living Wage conundrum. Where's the Freakonomics post on minimum wage/living wage and if they do anything other than create inflation? They must have one.


The $3 credit card fee may be a ripoff by the cab company. Their actual swipe fee could be 2.6-3.2% for the most expensive high rewards cards. OTOH, if the cab company has a transaction processor who charges a minimum swipe fee of $2-$3, they should consider switching to a cheaper transaction processor. Paypal, Square and others are getting into the business of direct processing. The banks and traditional processors will lose a lot of business in a few years when mobile payments take off.

I have had small vendors ask me if I have a different card when I pulled out a high rewards Visa of MC. I have been using my debit card for foreign currency (European) online transactions. US credit cards charge 3% whereas debit cards charge 1% currency transaction fees. The discount airlines in Europe charge exorbitant credit card processing fees at around 8 euros ($10-12) per ticket.

Some limousine and taxi companies offer a discount when one books in advance for longer trips (i.e. to the airport). I assume they can afford to offer that because they can use a cheaper web based credit transaction processing system rather than the more expensive traditional mobile units.



Maybe it would help to step back and look at the larger picture. Matt was foolish enough to travel to Lost Wages (in the middle of summer, even), a place whose only reason for existing is to fleece suckers of their money. So he discovered that the cab companies have figured out a way to snip off a few hairs for themselves, before the main fleecing at the casinos. I suggest he just accept it as part of the tourist experience.


"suggest to the driver that he set up his smartphone to take credit-card payments, cutting out the cab-company middleman"

Great idea on the surface. An iPhone with a Square reader may help out the cab driver in cases where the passenger may want to stiff the driver because of the surcharge, but would really piss off the cab company owners, who would likely want to fire any drivers subverting the system.



I'd suggest tipping.

The only time I subtract charges from tips is "delivery charge" on pizza delivery, since that charge is clearly going towards his paycheck. He wouldn't have a job if not for those charges.


First - $3 credit card fee is outrageous on an average charge of less then $14. Most people saying it's okay aren't paying it - their companies are.

I own a small business and I am charged 1.9% for each CC transaction.

Anyone can accept them on your iPhone for 2.75%.

Don't try and say that the 'mom and pop' are going to go under on a 2% ($.04) charge on a $2 bagel. Not happening. They have other issues.


Actually, cc companies charge $0.20 per transaction, plus their 2% or whatever. If it was just the percentage you'd be totally right, but if the transaction is $2 and I have to pay $0.22 in cc fees, suddenly it might not be worth it to take a cc, since I'm not paying 2%, I'm paying 11% of the transaction just in those fees. That $0.20 is not a big deal, of course, if the cc transaction is $150 or whatever.


you were absolutely wrong. Cab drivers typically do not own the cabs they drive, instead they "rent" them for the duration of their shift, in many cases owing the cab company a fee at the end. sometimes their only income from the shift is the tips they receive. this is crappy and you have put bad karma out there for yourself. I hope you never have to work a job where you rely on tips. Incidentally my second job is as a server for a national restaurant chain, currently they have a loyalty program that bombards members with coupons and a "pick three" meal deal going on. one cannot be used with the other, you would not believe how many customers become irate when faced with paying the full $12.99 for their pick three meal. and their water with lemon. how do I know I am in hell? People want icewater. but I digress, last week a woman screamed at me, peppering her assault with the f word and calling me an insufferable b*tch, "I am not f**king tipping you, you little twat, unless i can use this coupon." These decisions are made far above my pay grade, I just work here. Tip me or don't, that's on your conscience. the great thing about the whole situation is that every other table in my section, way overtipped me, after hearing her go off. So on her I lost $2.60, but gained about $50.00. Wish it worked that way for cab drivers. and I hope she brings her fat behind back sometime soon :)



Agreed. They are tools. Like "most" workers. I used to wait tables. In college. To pay my tuition and other bills (perhaps not like you but maybe not). I was the best waiter in the restaurant. I averaged 18-24% a tip (that is why I ABHOR those mandatory 18% tips on bills-I never give more in those situations as a server who accepts that should move to a restaurant who lets them EARN more by being good-I have no PROBLEM tipping and delight in tipping 25-40% when it is merited but this not often the case) I took on extra tables. Why? Because I was a capitalist and wanted to maximize my earnings. Stupid. Most of my peers were lazy. The bartenders were lazy on average. The cooks were lazy for sure (no tip incentive). It was brutal. But I made the most I could. So that now I don't have to earn cheap wages as the IT world pays be competitive wages based on merit. How crazy is that??? Now I am not the tool but the means of production setting my pay rate!!! Ergo, there should be no absurd minimum pay rate but that is a discussion for another day.



I just got back from Vegas. I had a $9.20 fare for less than 2 miles and I handed the driver a ten on a mini trip that was very time sensitive (tickets and a time we had to be seated so we were screwed). I was not willing to pay more. If the fare had been $8.50, I would still have given him the same. Still, he loses based on the idiot meter based on regulation and the city and his company and the crony capitalism in force.

Further, based on where McCarran is (right next to almost all the casinos/hotels) the idiot shuttle companies are in on a similar scam. Stay at Hooters or the Tropicana which can see the airport from their windows, the R/T shuttle fare per person is about $15 for less than 2 miles. If you want to go ALL the way to Circus Circus, 3 miles more up the Strip, the price is the same, so it doesn't matter where you stay based on that factor.

If you take the once an hour public express bus on the same route ($4/RT) the price doesn't vary either Vegas is an a-hole convention. The ruse? That you are stupid. Well, I am not. My wife and took the Westcliff Airport express both ways to the Trop (less than 2 miles) and back without getting raped and the loser cab and limo drivers were none the wiser. F them. They are total scum in my estimation and I am the winner based on economic intellect.

Anyway, good for you and screwing the drivers and their companies. If the dumb drivers (who can barely speak any English-why is that in Dos Estados Unidos?-my wife is Colombian, I am not racist, and the drivers in Cartagena tend is speak better English) can't get their ahole companies to stop screwing them, well, as a libertarian, I guess that that is capitalism in action as I subvert the whole messed up approach to getting to my hotel in advance by using the internet to do it. Guess what, I WIN!



See above. Las Vegas exists for the sole purpose of fleecing people. You know, or should, that if you go there, you'll wind up get fleeced, so why complain about the mechanism?


Really? Which Vegas are you talking about? The "old" one or the alleged "new" one? I saw gambling (the slots being the worst of them). I admit that I blew a C note on my beloved college, the underperforming Michigan Wolverines (my first bet on them in 25 years) but beyond that, I never bet a single dollar, and Vegas was all about lovely Americano excess and NOT being fleeced by the gaming industry.