APPLIED MICRO: The Economic Value of Norm Conformity and Menu Opt-Out Costs; Dr Kwabena Baah Donkor (Stanford Graduate School of Business)

Abstract

This paper theoretically and empirically analyzes trade-offs between consumption versus norm-adherence and choosing from a menu of default options versus computing a non-default choice. In the theoretical model, peoples' choices depend on consumption, norm conformity, and menu-opt-out costs. Using passengers' tips sampled from a billion NYC taxi rides, I empirically estimate the model parameters. I find that the cost of deviating from the norm tip and opting out of the default tip menu are both high relative to the taxi fare. I then examine the welfare implications of norm conformity and the positive and normative effects of default menu design.

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