I would have never thought that work as a hotel valet could be so exciting. I once heard wild stories about the night shift at a metropolitan hotel. “The cab ring is run by an Somalian named Ali,” one valet said. “His index finger was shot off in the Somali Civil War.”
The valets and the cab drivers have an arrangement. Whenever a hotel guest checks out and needs a ride, the valet calls Ali. Ali sends “one of his Somalian taxi drivers” to pick up the guest. In exchange for the referral, the driver slips the valet 10$. “It’s the most illegal thing ever,” the valet said. “We get death threats from the unions.”
I started wondering: What’s really going on in this transaction?
Unions try to retain finders’ fees
My first evaluation was the following.
The valets, by connecting riders to drivers, are acting as “market-makers”. This is a genuine and valuable service. The drivers (and counterfactually the riders too, were the valet’s services not already funded by the hotel) rightfully agree to pay for this service. After all, the benefit of finding more riders is (apparently) well worth the small fee the valet charges.
In fact, the passengers probably do pay for this service, albeit indirectly. If we assume here that – as is the case in just about any market situation – “economic profits are competed away in the long run”, it follows that cab drivers are just barely breaking even as it stands. The only way that they could get away with paying finders’ fees is by passing the resulting cost down to consumers. Of course, riders are free to choose other cabs. They don’t, though, indicating that for the passengers these higher fares are worth the convenience of a procured ride.
The cab drivers (and indirectly, the passengers) can, and surely already do, bid freely to set, in a market-directed manner, the precise level of this “finder’s fee”. In particular, cab drivers can abstain from paying this fee, though then they are left to find riders on their own.
The union has other plans. The union realizes that if it manages to coerce its drivers to band together to stiff the valets, many would-passengers would find taxi rides anyway. The union thus desires to shuttle resources away from the valets (and the passengers) and into the taxi industry.
Why is this practice prohibited not just by the union, but also by the law? Perhaps union leaders have convinced lawmakers to enact these laws on their behalf, in a classic case of rent-seeking.
Valet tips are bribes in a zero-sum game
If we introduce a bit of additional complexity, this view seems to give way to a much more sinister one.
Sure, riders enjoy convenience, and they benefit when valets find them rides. Yet these guests have very little knowledge of cab fares ahead of time, and they’re likely to blindly accept whichever rides the valets procure, even if fares rise inappropriately high. They have asymmetric information. Drivers observe that those who tip valets earn rides. Though they have to pass the resulting costs onto their passengers, they are not penalized for doing so, and market forces fail to stop the practice. Drivers begin aggressively outcompeting each other, forced to hand over more and more to access the customers the valet controls. The unsuspecting passengers, who ultimately bear the cost, are never the wiser. The process continues indefinitely. The passengers lose while the cab drivers, and most of all the valets, win.
Ideally, cab drivers – with the sort of organizing help that a union, or the law, is designed to provide – would stand together to forbid paying the valets, keeping fares low. Symmetrically, hotel managers, who desire to protect their guests, forbid these collusive arrangements. Even a few drivers and valets, however, can agree to conspire, generating immense gains, while riders barely notice. The optimal state is hard to preserve.
Things get even more scary if we consider the possibility that the colluding drivers are unskilled, unlicensed, or uninsured. Add to this the fact that the hotel guests perhaps defer to the valet not just out of convenience, but also out of trust. The valets are abusing the trust and endangering the safety of the guests and the hotel for their own personal gain.
The valets are, in effect, exploiting their privileged position as agents for the hotel and its guests by accepting bribes, from the drivers, for exclusive access to the guests whom they’re paid to assist and protect. Strikingly, the drivers too could soon become trapped. Drivers might find themselves competing with other drivers, ceding higher and higher bribes for access to the same fixed pool of riders. They have no choice but to play along.
Somewhere in between?
The real situation might lie somewhere still more complex.
Granted that this activity occurs – and that it’s both damaging and unethical – the full extent of the potential harm remains unclear. For one, hotel guests might well still benefit from the services of the valet (compared to no service at all) even if the services have been compromised. And while hotel guests’ information is asymmetric, it’s not nonexistent. If prices rose and quality fell too much, passengers would begin stepping out of cabs and walking to the light-rail (or to other cabs). The guests can’t be exploited unlimitedly. Finally, hotels could catch and fire their rogue valets, or the valets could decide to act properly.
Even a degree of information asymmetry, though, would permit the process to continue too far, allowing fares to rise and quality to fall beyond what better informed drivers would otherwise have demanded. Valets stand to gain and passengers stand to lose. This is a subtler form of the above argument.
Asymmetric information probably does exist.
There are other countervailing factors. The valets don’t have complete control over ride allocation, and nothing stops non-participating drivers from waiting for passengers at the hotel. Valets do have some of this ability, though, and it’s more economically efficient for drivers to wait for the call than to wait at the curb. Even so, though, it’s difficult to drop everything when the call comes in, and yet this is why Ali’s dispatching organization is so effective. Ali could presumably do the same without paying bribes, though. Finally, it’s not clear how much Ali’s group benefits from the practice. For all we know, rides are a dime a dozen on the street, and information asymmetry is equally present there too.
Valets as impartial agents
Hotels expect valets to act as impartial agents. This is indeed a service, and it might seem strange to demand that they do it for free. We don’t, though; hotels, presumably by asking higher room fees, subsidize the valet’s wages (as well as the hotel’s compliance enforcement budget). This neglects the broader question, though, of why hotels don’t simply relinquish control of the “taxi agent market” to actors closer to the market forces. Hotels could excise the payment corresponding to this service from valets’ wages, perhaps lowering room fees in the process. Drivers and riders could contract directly with valets, or remove them from the process altogether.
In fact, these are two different proposals. In the latter, agents cease to exist, and passengers and drivers negotiate directly. In the former, passengers and cabs choose freely among valets in a competitive “agent market”.
That both of these ideas are poor is due precisely to information asymmetry. Guests are ill-equipped to operate in the cab market, or in the agent market, single-handedly. Value is gained when hotel guests contract with their hotels for the provision of an impartial agent. In fact, the superiority of this strategy is manifested in the empirical fact that market forces have shaped the hotel industry to do just such a thing.
This approach is harder to enforce and preserve. Yet collective societies – featuring cooperation, punishment, and trust – exist precisely so that we can turn to collective solutions to collective problems. To simply abandon the collective is certainly not always the answer.
When and why does bribery happen?
Sometimes, though, it just might be. Instead of wringing our hands in exasperation as the immorality of the valets, we should soberly examine the incentives they face.
If valets cooperated — or, what amounts to the same thing, if it were possible to force them to cooperate — then passengers would surely benefit from the hotels’ arrangement for their services. This cooperation, though, could be an unreasonable goal. Guests might prefer to handle the thing themselves and save on the room fee. Perhaps a persistent market failure explains the hotels’ insistence on handling the service.
Bribery tends to occur, or become possible, in the presence of encumbering social structures in which individual incentives deviate from the social good. It’s only because the valets are entrusted to their positions — and because, in these positions, good behavior is effected via promise and not reward — that bribery begins to carry benefit.
Provided that valets have signed employment contracts which demand their cooperation, their conduct does assume moral import. But a larger, and purely descriptive, question looms: given the difficulty of enforcing their cooperation, would the collective or the market solution bring better a outcome?
Though collective approaches can help, they often have costs. The ideal choice might depend on empirical matters of fact.
Economic assessment and policymaking
This investigation has already begun to exhibit the problem, classic in economics, whereby the ground-level realities of a situation make it very difficult to analyze economically. We can construct small formalized models, and discuss them. As the model accrues layers of complexity, though, things can get out of hand.
Normatively evaluating economic situations like this one, though, is crucial for policy.
To form this judgment, it’s not sufficient to observe the behavior on the ground. Sure, this behavior exists. But is it good or bad, the result of constructive or destructive economic forces? Similarly, it’s not sufficient to observe the policy response. The union and government response seems overwhelmingly negative. But is this response good or bad, the result of constructive or destructive political forces?
Complication aside, the valets here seem wrong to me.