Iefficiency of Splitting the Bill

In: Business and Management

Submitted By maboualam
Words 3214
Pages 13
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.

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 efficiency. Diners prefer the individual pay to the inefficient split-bill method. When forced to play according to a less preferred set of rules, they minimise their individual losses by taking advantage of others.

Economic theory is unambiguous in its prediction that if externalities exist, outcomes are likely to be inefficient when agents selfishly maximise. The literature on externalities, as well as its derivatives in public goods, tragedy of the commons and moral hazard studies, has shown that externalities lead to inefficient levels of production and consumption. This result depends crucially on the general assumption taken by such studies that human agents maximise selfish payoffs without regard for others. With the emergence of behavioural economics, economists have come to question whether people actually ignore costs imposed on others when reaching economic decisions. If altruism is common, the various proposals in the literature to solve externality problems may be unnecessary or even harmful. For example, the government in a public good setting may actually reduce voluntary contributions by interfering with the provision of a public good (Andreoni, 1993). Similarly,…...

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