Splitting the bill equally for a restaurant meal leads a group of diners to spend more than they would were each person to pay for their individual order. That is the central finding of experimental research by Professors Uri Gneezy, Ernan Haruvy and Hadas Yafe, published in the April Economic Journal. The study also finds that 80% of diners would prefer paying individually to splitting the bill equally.
These results have important implications for such phenomena as overfishing, deforestation, air and water pollution and arms races – all of which involve ''negative externalities'', where people can impose some of the costs of their actions on others, leading to undesirable outcomes for society as a whole.
Consider a group of six diners meeting at a restaurant with the intention of splitting the bill equally at the end of the meal. Each of the diners has to decide how much to order for themselves but will have to pay only a sixth of their own order as well as one sixth of everybody else''s order. In this situation, a selfish diner could enjoy an exceptional dinner at a bargain price.
In this study, the authors 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 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 inbetween the other two. The literature on ''negative externalities'' is based on the prediction that an economic agent who is able to impose some of the cost of his consumption on others will over-consume relative to the ''socially efficient'' level.
The findings of the restaurant experiments are consistent with these predictions. The average spending per person in the free meal treatment was more than twice the average spending per person in the individual pays treatment, with the even split treatment falling in the middle.
A fourth treatment, in which each participant pays only one sixth of his 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. But 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 one sixth of a dollar.
In the fourth treatment, this will increase only the individual''s cost by one sixth of a dollar, 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 treatment of the even split. On the other hand, if they care also for the well-being of the other participants (or for ''social efficiency''), they can be expected to consume less in the fourth treatment than in the even split treatment.
The results, however, indicate no substantial difference in consumption between the two treatments. This implies a minimal regard for others. The efficiency implication of the different payment methods is straightforward. When
splitting the bill, diners consume such that the ''marginal social cost'' they impose is larger than their own marginal utility and largely ignore negative externalities they impose on others. As a result they over-consume relative to the social optimum. The authors conclude that the only efficient payment rule is the individual one.
Interestingly, subjects'' preferences are consistent with increasing efficiency. When asked to choose, prior to ordering, whether to split the bill or pay individually, 80% choose the latter. That is, they prefer the environment without the externalities. But in the presence of externalities, they nevertheless take advantage of others.
These results have great importance in the design of institutions. Institutions and rules that ignore the effect of negative externalities are inefficient – not only in theory, but also in practice. This inefficiency is the result of people playing the equilibrium of the game – even if they would all prefer to be in a ''different game''.
''The Inefficiency of Splitting the Bill'' by Uri Gneezy, Ernan Haruvy and Hadas Yafe is published in the April 2004 issue of the Economic Journal. Gneezy is at the University of Chicago; Haruvy and Yafe are at the University of Texas at Dallas.