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Essays in Microeconomics

  • Author(s): Donkor, Kwabena Baah
  • Advisor(s): Perloff, Jeffrey M
  • et al.

A person’s behavior is influenced by tradeoffs between (1) personal preferences versus social expectations, and (2) choosing a menu or default option versus actively computing a preferred choice. To understand the mechanisms behind the decision-process, one must understand the empirical relationship between decision-makers’ preferences and their sensitivity to social expectations and menu or default options. The first part of this thesis uses both a revealed preference approach and a model that empirically identifies the stated tradeoffs to examine tipping in New York City (NYC) taxi cabs. It uses the estimated model to analyze the welfare implications of presenting menus or default options.

The second part uses insights from the first part to examine why individuals in the less wealthy neighborhoods of NYC give cab drivers more generous gratuities than their counterparts in wealthier areas.

The final part examines how the Affordable Care Act (ACA) affected seasonal farmworkers’ choice of health insurance coverage, medical services utilization, and jobs with employer-provided benefits.

The first chapter asks the question: Does a menu of recommended tips presented with a bill influence how much customers tip? The answer to this question depends on customers’ ideal tips, how much customers are affected by their beliefs about a socially acceptable tip, and the effort costs of computing a tip versus choosing from a menu.

First, changes in the menu presented to passengers in NYC taxis are used to nonparametrically estimate that the cost of actively computing a tip and not following a menu is about $1.89 (15.53% of the average taxi fare of $12.17). Second, a model is used to explain the mechanisms behind the decision-process. In the model, passengers’ tipping choices depend on their perception of a socially acceptable tip (social norm tip), the shame from given less (norm deviation cost), and the difficulty of calculating a tip (cognitive cost). An estimate of the distribution of beliefs about the social norm tip averages about 20% of the taxi fare. Customers incur a norm deviation cost of tipping five percentage points less than the norm of between $0.30 and $0.38. The cognitive cost of calculating a non-menu tip ranges from $1.10 to $1.32 on average.

The model predicts that taxicabs currently present customers with a nearly tip-maximizing menu, and this menu increases tips by 14.65% relative to not presenting a menu. Taxicab companies appear to have learned over time to converge to the tip-maximizing menu. Welfare calculations suggest that the current tip menu in NYC cabs increases overall welfare by $1.08 per taxi trip relative to presenting no menu.

The second chapter documents that customers in low-income neighborhoods of NYC give more generous tips than their counterparts in wealthier areas. Several studies suggest similar counterintuitive findings. However, it is difficult to establish causality in these findings because wealth cannot be easily randomized. This chapter relies on insights and the model from the first chapter to explain the relationship between income and gratuity. The findings suggest that the distribution of beliefs about the social norm tip in the wealthiest areas averages about 20.57% of the taxi fare compared to 29.78% in the poorest areas. In contrast, the norm deviation cost is higher in wealthier neighborhoods. For example, a five-percentage point deviation from the norm in the wealthiest areas is almost twice the cost in the poorest areas ($0.26 versus $0.14). The cognitive cost of calculating a tip is lower in poorer areas compared to richer areas—a reflection of a higher opportunity cost of time in wealthier neighborhoods.

The third chapter (coauthored with Susan Gabbard and Jeffrey Perloff) studies how individual ACA policies affected seasonal farmworkers’ choice of health insurance coverage, medical services utilization, and jobs with employer-provided benefits. Seasonal agricultural workers are an important target population for the ACA. These workers have low incomes, have relatively little health insurance coverage, and face many job-related health risks. The chapter concentrates on four ACA policies that were likely to affect farmworkers. First, Medicaid expansion. Second, health insurance premium subsidies. Third, an individual mandate to maintain health insurance coverage. Fourth, the ACA prohibited insurance companies from setting insurance policy prices based on pre-existing health conditions.

The findings suggest that the ACA decreased the use of employer-provided coverage and substantially increased the share of workers with government insurance. Workers with pre-existing health conditions consumed more medical services, relative to those without pre-existing health conditions. The ACA did not reduce emergency room visits. However, it induced workers with pre-existing conditions to make greater use of private doctors and private clinics, hospitals, and community health centers.

Menus, default options, and social norms are important phenomena that deeply guide human behavior. However, in a field setting, the preferences of decision-makers and their perceptions of norms are difficult to observe, quantify, and study scientifically. The first two chapters of this thesis empirically identify unobserved consumer preferences to gain a better understanding of how menus, defaults, and norms influence consumer tipping choices in NYC taxi cabs. The findings are useful in preference identification, and considering more general “nudges,” such as those that are widely used by businesses and policy makers. The ACA law targeted people like farmworkers who are low-paid, traditionally had low rates of coverage, and suffered from more health challenges than most other workers. The third chapter is the only study to examine the effects of the ACA on farmworkers’ use of medical services, where they go for treatment, and whether their job provides health and non-health benefits.

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