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Iefficiency Of Splitting The Bill Essay

3234 words - 13 pages

The Economic Journal, 114 (April), 265–280. Ó Royal Economic Society 2004. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

THE INEFFICIENCY OF SPLITTING THE BILL*
Uri Gneezy, Ernan Haruvy and Hadas Yafe
When agents are ascribed selfish motives, economic theory points to grave inefficiencies resulting from externalities. We study a restaurant setting in which groups of diners are faced with different ways of paying the bill. The two main manipulations are splitting the bill between the diners and having each pay individually. We find that subjects consume more when the cost is split, resulting in a substantial loss of ...view middle of the document...

, 2001; Schulze and Frank, 2003), and the mere sanctioning of an activity may be counterproductive (Gneezy and Rustichini, 2001). Experimental studies, with few exceptions, find evidence against theories based purely on selfish motives. The studies find that people free ride but not to the extent economic theory predicts (Dawes and Thaler, 1988). Hence, despite the strong predictions generated by classical theory in externality settings, social scientists often question the truths provided by it. To test economic predictions, we investigate a familiar environment. The unscrupulous diner’s dilemma is a problem faced frequently in social settings. When a group of diners jointly enjoys a meal at a restaurant, often an unspoken agreement exists to divide the check equally. A selfish diner could thereby enjoy exceptional dinners at bargain prices. Whereas a naive approach would appear to suggest that this problem is not likely to be severe, it appears that even the best of friends can sometimes find it rather severe.1 Furthermore, this dilemma typifies a class of
* We thank Richard Thaler, Mark Walker, anonymous referees, the editor and seminar participants for comments. 1 Ross:... plus tip, divided by six. Ok, everyone owes 28 bucks. Phoebe: No, uh uh, no way, I’m sorry, not gonna happen. (Friends, Season 2, Episode 5). [ 265 ]

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serious social problems from environmental protection and resource conservation to eliciting charity donations and slowing arms races (Glance and Huberman, 1994). We observe and manipulate conditions for several groups of six diners at a popular dining establishment. In one treatment the diners pay individually; in a second treatment they split the bill evenly between the six group members. In yet a third treatment, the meal is paid for entirely by the experimenter. Economic theory prescribes that consumption will be smallest when the payment is individually made, and largest when the meal is free, with the even split treatment in-between the other two. The restaurant findings are consistent with these predictions. A fourth treatment, in which each participant pays only 1/6 of her own consumption costs and the experimenter pays the remainder, is introduced to control for possible unselfish and social considerations. The marginal cost imposed on the participants in this treatment is the same as in the even split treatment. However, the externalities are removed: in the even split case, increasing an individual’s consumption by $1 increases the individual’s cost, as well as the cost of each of the other participants, by $1/6. In the fourth treatment, this will increase only the individual’s cost by $1/6 but will have no effect on the payment of the other participants. In other words, the negative externality present in the even-split treatment is completely eliminated. If participants are completely selfish, the fourth treatment should not affect their consumption relative to the second...

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