Russ Roberts

Anthony Gill on Tipping

EconTalk Episode with Anthony Gill
Hosted by Russ Roberts
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The Infidel or the Professor?... To Tip or Not to Tip...

tipping.jpg Why does tipping persist? Despite the efforts of some restaurants to stop tipping, it remains a healthy institution and has recently spread to Uber. Political scientist Anthony Gill of the University of Washington talks with EconTalk host Russ Roberts about why tipping persists and what it achieves despite there being no formal way of enforcing this norm.

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0:33

Intro. [Recording date: October 30, 2017.]

Russ Roberts: Anthony Gill is back today to talk about a recent paper he's written on tipping--a little extra on top of your restaurant bill or your taxi fare for the server in the restaurant or the cab driver.... So, there's been some unease about tipping in recent years. Some people are trying to give it up; some restaurants have stopped tipping as a practice. There's been some social commentary that tipping is a bad thing. Describe some of that unease and criticism and then we'll talk about why tipping seems to persist despite that unease.

Anthony Gill: Yeah. About 5 years ago or so there was a trend in the restaurant industry toward the no-tip/living wage model of providing for the wait staff. And there's a spate of articles in popular journals, Market Watch and Fortune Magazine, Slate, that said tipping is going out of fashion: it's not pleasant for the customers and it would be more efficient for the restaurants just to have a flat fee for the service or to price it into the actual price you pay at the end leave less to the customer. That happened in several dozen restaurants. Most of them tended to be upper scale boutique type of restaurants. But the movement really hasn't caught fire. It really hasn't moved anywhere. And I was watching this out of my eye--I teach tipping as a way of teaching various economic principles in my political economy class--and I said, 'Hmmm. If the no-tip movement gets any traction, I won't have anything to talk about in my class any more.' So, fortunately it didn't go away. And, I thought more about it and I said this is such a wonderful institution. There is one thing, though. It's not just a recent trend that people are uncomfortable with tipping. It goes way back into the 1700s. In fact, there's a nice book, one of the only books written about tipping, by Kerry Segrave; and back in the 1750s or 1760s in London, the nobility tried to ban tipping. And there was a riot--that, the servers and the valets that were receiving the tips said, 'No, no. You'd better keep those tips.' So, the nobility backed away. So, history tends to repeat itself.

Russ Roberts: That's really interesting. I think about my own tipping life. It's definitely one of the hard parts about adulthood, when you go from being a kid and being treated by your parents to being an adult where you are paying for your own meal and you've got to leave the tip, there is some unease because it's hard to know what the right thing to do is, at first. Or at least there's some art to it; or at least there should be, as we'll discuss. So, what are the arguments for tipping? Why is this a custom or norm that persists?

Anthony Gill: Well, I make three arguments in my paper; and I'm sure we'll discuss them one at a time. But, the most common one and the one I teach in my political economy class that resonates most with students is that it helps to solve a principal-agent problem, wherein the restaurant manager cannot be on the floor monitoring the servers all the time, they need to have some kind of incentive to make sure that the servers are doing a good job and picking up on these subtle cues that the customers are giving. This gives more power to the customer, actually. It allows them to say, 'Hey, I would like to be left alone with my date here,' or 'Could you please hurry the service along? I have to get to the Broadway Show. The curtain is about to go up.' So, that solves the principal-agent problem. The other argument I make is that it allows for voluntary price discrimination. And this is a little bit more of a subtle and unusual argument. But, it allows the restaurant owner to shift the decision about how much to charge for service to the customer. Now, one would think that one would naturally not pay anything for that, because we always tend to want to pay the least amount for anything we can get. But, the fact that there's a norm--there's a suggested amount that we know in society, that 15% or 20%, which should, by the way, alleviate some of that uncertainty there--your parents should have taught you a good 15% tip is what you should leave; so that sounds pretty easy and now with the smartphones we all have our easy calculator for these things. But, if everybody knows this norm and we can shift that cost to the customer, it actually is very beneficial to the restaurant owner. The last argument I make is on a more macro level and has to deal with social norms within society, and I think tipping helps to promote norms of trust in society that help promote anonymous trade in large market systems.

5:48

Russ Roberts: I'm going to defend my parents, to start with. Because if everybody tipped exactly 15%, there's not much role for tipping. It's just a strange, weird custom that has developed to divide the payment to the restaurateur between the formal check and the tip part. It's just a 15% surcharge; it's on all prices. So, that would actually kind of ruin the idea of tipping as a principal-agent problem: that, it's designed to monitor the performance of the server, monitoring being done by the customer rather than the employer, the restaurant-owner. Let's stick with restaurant owners, just to make this simple now. Of course, there's tipping in a few other places and maybe we'll talk about it. But, my point is that if everybody just blindly and mindlessly tips 15% for good service and bad service, then it's not a very interesting institution. The institution becomes interesting when you have the freedom to tip 10% or 20% or nothing--and some people will cruelly leave a penny as a tip because they are either angry or offended by the service. So, I think, when I said I was uneasy, it wasn't because I couldn't multiply times .15, or 1.15, depending on how you are paying the bill. It's because I wasn't sure whether--should I tip 17%? 20%? Is it really good service? What if it's not good service? And I think the--even though I'm very sympathetic to your argument for tipping and have made it for myself many times in class and elsewhere, there is a challenge when people don't feel comfortable leaving a small tip, because then it doesn't perform its function.

Anthony Gill: Right. So, maybe I should clarify: It's not a norm that says you must always leave 15%, but 15% within a range. And, in fact, if you're feeling much more generous--if you had wonderful service and the wait staff was just wonderful--feel free to leave, 20, 25, 30%. And some people will even leave much more. I know I have on many occasions. But, on the other hand there's also the ability to withhold. And, I remember this being taught to me when I was younger, that, 'Oh, you should always tip 15%; but if the service isn't really that good, you know, drop it down to 10% or 5%.' If it's really bad--and I've been in restaurants with my family where it's been horrible--we'll just walk out with no tip, as a signal. So, I know many people, when I talk to them, they say, 'Yeah, well, I feel like I always have to leave 15%. Why doesn't the restaurant on and make it easy for everybody else?' I say, 'Well, the possibility that you can withhold the tip is really what motivates the principal-agent problem, or at least the solution to the principal-agent problem. As well as the possibility that you could leave 20, 25%.'

Russ Roberts: And of course some restaurants, with large parties in particular--meaning, if a lot of people are eating at the table--put a tip automatically on the bill without giving you any chance to do your job. Because, in that case, if you happen to be forgetful, cruel, selfish--whatever it is--or not willing to live up to the expectation of the tip, you've imposed a very high cost on the server; and the owner doesn't want that to happen. So, they often will impose a mandatory tip, which is an oxymoron.

Anthony Gill: Well, that's interesting. I have to admit here that part of my interest is that I used to work in the pizza industrial complex, or Big Pizza as it's sometimes called. And the restaurant that we were at would always add tips onto parties that, I think it was 6 or 7 or more, especially if they were teenagers.

Russ Roberts: Yep.

Anthony Gill: There was a big concern about that. And this, for me, [?] opens the door to teaching about collective action problems, because if you have 6 or 10 people at the table, everybody kind of wants to chip in; but maybe I don't have to chip in that much because that person next to me just flashed a big wad of cash and they'll chip in a little bit more. And so, the restaurant owners knew that if you had a large party it would be difficult for people to calculate that, and they made it easier. And the same thing with teenagers. And this was a big benefit for them to encourage business to come in, because I knew that the wait staff at this restaurant--whenever 6, 10, 12 teens would come in after a school prom or something, nobody wanted to serve them because they knew they would be horrible tippers. But the restaurant owner wants these people to come in, not only to fill the tables, but because, when they graduate and they have families, they want them to keep coming back, as well. And so they needed that way--there's kind of an additional step so, 'Okay, in this situation, we need to make this tip mandatory so that the servers will actually go and give service to these tables.'

10:47

Russ Roberts: So, I want to go a little bit deeper into the principal-agent problem. And, to do that I think we should talk a little about what the nature of the service is. You talk in the paper about the difference between a tip jar at, say, Starbucks and a tip jar at the front of a fast food place where you are not really being served in the normal sense of a waiter or waitress, but just, the food is being handed to you across a counter, to a sit-down restaurant where you are going to be there for a while and there's a much larger dimension to what is called good service. In the first case, in the case of the counter, it's: Did the food get passed across to you with a smile, ideally? But in the case of a restaurant, it's quite subtle. And I think that plays a very large role. So, let's just brainstorm a minute about the nature of service. You gave a couple of examples already: sometimes you want to be left alone; sometimes you are in a hurry--you have a reason, you have a plane to catch or a show to see. What are some of the other aspects of this?

Anthony Gill: Yeah. When I talk to people about the restaurant industry they often view these jobs as very low-skill jobs and having worked in the Big Pizza industry I know that it takes a lot of skills to read people's moods, and whether they want their glass refilled, that's another example. Do I want somebody constantly refilling my water glass, or do I want them to leave me alone? Can I chat up the wait staff at all? I oftentimes like talking to the waiter or the waitress to find out what are things to do in this town; I haven't been here before. Sometimes I don't want that. So, there's a lot of these different kinds of things. And sometimes I like a server that likes to be fun and jokes with you. Other times I just want to get to business. It's interesting because these are moods that I have throughout various times in a week. And it's difficult for anybody to really know that when you just walk in or are standing, waiting to be seated. So, having a person being able to pick up those subtle body movement clues--it's a really tough job.

Russ Roberts: Yeah, it's definitely an art. The other issue I always think of is, when things aren't going well in the restaurant, which often has nothing to do with the waiter or waitress, I often want just to be reassured that I haven't been forgotten--that it's coming soon, the food is coming, or whatever it is. So, that's just one more dimension to--there's really two dimensions. There's: How much interaction do I have with the server? And, what's the nature and quality of it? And then there's the plating--obviously, putting the food down and all that, and clearing of the table, and knowing when to bring things. Those are things that are relatively easy to do and to teach. But that other part, as you say, is a subtle art. And, I think the basics of delivering the food, you don't need tipping. I think it's really important to get that across. Because those can be monitored. That performance can easily be monitored by the restaurant owner or the manager. It's those subtle things that can't be monitored. It doesn't matter how much you walk around the room as the manager to keep an eye on things. Nobody wants a manager hovering over the table, either, by the way. To me, the problem is: Only the customer--I think of it as a Hayekian local knowledge problem--only a customer has the information about whether the server is doing a good job.

Anthony Gill: Exactly. And I use that in the paper, to say that the knowledge is very, very local at that specific time and that specific table. That, a table just 10 feet away might be entirely different, and so you have to treat that differently. And so, you need these people that can use that information and provide the best service possible. And I think that's just a really neat thing. And I've talked to many wait staff about how do they do this? How do you know who is going to be a good tipper, who is not going to be a good tipper? It's just a fascinating science of body language.

14:59

Russ Roberts:And, of course, that just introduces another principal-agent problem. Which we'll come to. Which is, as the custom has evolved of giving me, the customer--sorry about that pun; probably isn't really; it might not even really be a pun; I don't know--but as the customer's control over this has evolved to being a nontrivial one, because tips are a very large part of a server's income, often, in certain industries, certain types of restaurants, certainly in bars and places where alcohol is served where tips tend to be larger--which means that the salaries tend to be lower and the tips tend to be a bigger proportion--in those kind of settings, now it's up to me. Now I have the power to monitor, but I also have the power to shirk my job as a monitor and not give a tip. Or to give a lazy tip. And so, on the surface it doesn't seem to solve the problem at all.

Anthony Gill: Yes. And I think that's where the strength of the norm becomes very, very important. And I think that--I don't know if you want to talk about that now or save that for later. But the interesting thing is that, in order for this principal-agent problem to be solved, it really has to be that the norm of tipping has to be shared very broadly within society. There are many instances where people will not tip. We're out here in the Pacific Northwest, and so we get a number of tourists from China. And, tipping is not the norm there. So, when a tourist comes over and is very unfamiliar, is not familiar with the norm of tipping, they won't often leave a tip. And that creates problems. Actually I've talked to a number of waiters and waitresses that say, 'This is a problem. We see tourists from this country and we really don't want to serve that table. We'd rather pick a different table.' And there's oftentimes a little bit of argument or scuffle amongst the wait staff of who is going to serve this table, where you're not going to have a tip. So, the norm of tipping really has to be shared broadly, and has to be fairly strong that people have to obey it. And I think that in and of itself is a really interesting puzzle, because a thinly rational person, strictly speaking, is not going to ever want to leave a tip after the meal, after the bill has been delivered, because, why should you? Paying 0 is better than paying 10% more.

Russ Roberts: Well, the obvious counterexample is you might want to eat in that restaurant again. The server's not going to be too happy to see you. But there is always the challenge, as you point out in the paper, of, when you are in a city you've never been to before, you probably won't be back, or in particular when you are in a foreign country, where, you may not even know the norms. You gave an example of a person who comes from a country without a norm of tipping to a norm-place where there is tipping. I've been in countries where there is a norm of no tipping. I didn't know that at first; and I'm overtipping--making a lot of people very happy, no doubt. And in certain foreign countries some things are tipped that aren't tipped here; some things are not tipped there that are tipped here. And the amounts are different--the norms of what the amounts are. That's why people read guidebooks and Google before they go on a trip, if they're smart. But, that is a big challenge. But, certainly when you travel in a city you've never been in before, don't expect to come back to, or if you just get a cab driver in a large city, where you will probably never get that cab driver again, in some dimension--I would disagree with this characterization--but in some dimension it's irrational to tip.

Anthony Gill: I think in a thinly rational sense it is irrational to tip. But that's why we have thick rationality. And that's why economics needs to pay attention to norms and how we solve these larger problems at the micro level.

18:53

Russ Roberts: So, let's just stick a little bit longer with the principal-agent. I just want to raise the--and, to make it clear, I think tipping is a really beautiful thing. But I'm open to the possibility it's outlived some of its usefulness. So, I want to be a little bit critical of my view and your implicit view in the paper, which is: it solves this principal-agent problem. There are other ways to solve it. The most obvious way is, you fire bad servers. We haven't talked about it yet, but obviously tipping, by changing the amount that a person can earn--so a bad server gets lousy tips and then has low income, and decides to go do something else. A good server is rewarded and is enthusiastic about the job and stays in that industry and in that restaurant. But the other way to do that is just to fire people who do a bad job and give raises to the best servers. What's wrong with that?

Anthony Gill: Well, the question is, how do we know who the bad servers are or not? Now, obviously, if a customer has a really bad service at a table at a point in time, they can stomp up to the manager and say, 'This person was just the worst wait staff that we've ever had.' And, that is information. But that doesn't always get communicated all the time. And, again, if you are dealing with fairly slim margins here where people say, 'Well, they just didn't fill the water glass enough. I don't think I'm going to come back to this restaurant this week or next month; we're just going to take it off our list of places that we go,' the management never gets those signals. And, one of the things that I argue in here in terms of the principal-agent problem is that servers who are not very good at this--who cannot pick up the cues, who are not very good at interacting with people--will give signals themselves, and in essence will fire themselves. They might see another waitress in the restaurant just raking in the tips that night, and they only have a paltry sum at the end of the night for themselves, and they say, 'Well, you know, I don't know why I'm not doing a good job here.' So, they either can try to improve themselves, or say, 'Maybe I should go choose some other type of occupation.' And that's beneficial to the industry as a whole. First of all, if you have people in essence firing themselves or leaving the industry, that eliminates a huge bureaucratic headache, because laws today make it very difficult to get rid of people. But, on the other side of it, is that overall the quality of service in restaurants will improve as the low-quality servers filter themselves out because they are just not seeing the rewards that others get.

Russ Roberts: Well, you pointed out in the non-tip system, management doesn't get the signal; but, of course, they don't get the signal in the tipping system, either. The server gets the signal. We rely on the fact that servers that don't get good tips leave--or try to improve. Maybe they try harder. Maybe they put a smile on their face. Maybe they watch the other servers and figure out what works and what doesn't, and then they are incentivized to do a good job. But let me pick an alternative system. I can think of a few. We could probably think of a few if we thought about it longer, a few more. But, one thing you could do--which, of course, let's think about--let's think about the quality of the food. So, the food comes to my table. I asked for the steak to be medium, and it's well done. Or, something is almost raw. I might send it back. And that's an observable event. But, a lot of times I'll just say, 'Well, that wasn't very good. It's interesting: I don't tip the chef; I don't tip the cook--although some restaurants divide tips up. This is, I'm talking about specifying it. We assume that the manager can monitor that part of the quality equation. Right? And, at the end of the meal, when I pay, if the manager is running the cash register--often, not--but the manager can be there and can sample from the clientele and ask, 'Did you enjoy your meal tonight? How was your service? Did your server do a good job?' And, even if we might feel uncomfortable being critical publicly about that, often the manager could see in the face of the customer whether they were happy or not with the service of the food. So, I just think there are different ways--you could have a survey card at the end--with the check could come a survey card: If you fill out the survey card you get a discount. So, it's--tipping is one way to solve it. There are other ways to solve it. Obviously, there are lots of service interactions that don't have tips. And I think the key, then, is why restaurant tipping is common but lots of other places where there is service and where there is a principal-agent problem, you don't see it. You want to speculate about that?

Anthony Gill: Yeah. But, let me back up with, in terms of the chef as well. Because I think, depending on how a restaurant can manage this, the principal-agent problem can be shifted around in very creative ways. I know that a number of restaurants, the servers--or the wait staff actually shares their tips with the servers. My son was a person who brought out the food and cleaned the tables this summer at the Duvall Tavern, and I was surprised to find out that he was getting some tips. I said, 'You're not doing anything important, son.' But the wait staff really wanted him to do a very good job for the next person to come in, so they incentivized him to do a good job by sharing some of their tips. And, sometimes they even share with what they call 'the back of the house'--the people making the food--because if your salary is based upon the tips that you get, you want to make sure that the order is right. So, when the steak comes out and it looks a little bit too done, you are going to go back to the table and say, 'I think we made your steak a little bit too well done, Russ. We're going to take care of that for you. Let me give you another glass of wine.' So, everybody kind of helps--this helps to shift the monitoring around, I think, in very creative ways. Now, in terms of other places that we tip--I've been thinking about this, too. And, one thing that has driven me crazy--and this may go back to what you were talking about, has tipping lived past its usefulness, and we've been oversaturated with this--is the self-serve yogurt shops. And, I love self-serve yogurt shops, but I will go make my own yogurt; I put on my own toppings, and I just go up to the counter; they weigh it and they just charge me a certain amount. And then I see a tip jar there, and I--first time I saw that I said, 'You've got to be kidding. I should be tipping myself, because I did such a good job. But, why am I doing this here?' And, I look at those jars, and, for the most part I just see a few coins in there. And I think what is happening is that as inflation has gone up over the years is that the value of a penny or a couple of nickels and a dime loses its--I don't want to carry it in my pocket. So, people end up with a yogurt for $4.89 and just go ahead and drop the 11 cents into the bin. So, the people there at the counter can pick up a little bit of the residual in terms of that because people don't want to pick it up. But any place--and I've thought about this; I have my students think about this, too--any place where you tend to get repeated service interactions and service interactions where you do have to customize the service a little bit: So, barber shops are an example of this. Coffee shops where you want a specific drink--one of those 5-adjective lattes with, you know, a special smiley-face drawn on it, you tend to tip there. I would tip for a drink like that, but I rarely ever tip for a cup of black coffee. Pour me the coffee, that seems pretty easy; it's like a transaction at McDonald's. So, when you start going down the list and thinking about those different places, you do see where you have repeated interactions. The one place that surprised me--and I didn't learn this until about a year ago--that, you are supposed to tip the housekeeping service at hotels.

Russ Roberts: I do--

Anthony Gill: You do. How long have you?

Russ Roberts: I've been doing it for a long time. I leave a dollar a day, sometimes a little more if I've got family members with me who are--not as clean as I am, more likely to leave a mess behind of some kind. No, I try to leave at least a dollar a day. But, again, that's a strange interaction, because I don't see the person--I almost never see the person. And, this last trip I happened to not get maid service for two days, and I just tipped double--I just put $2 or $3 down, more than I normally would, because even though I only got one day of service I figured it's a little dirtier than it normally would have been if I had gotten it every day.

27:41

Russ Roberts: But, I want to make a distinction here, because I think it's important. I don't know how important this whole topic is: I love it, because it's such a fun application of incentives, etc. But, I think there's a difference between the restaurant and--I'll give you four places where I tip regularly. And, I think three of them are similar and I think one's very different; and I think it helps eliminate the one that's different, as well. So, I tip the woman who cuts my hair. I tip a person who carries my bags up to my room. I also tip the person at the airport who checks my bags at the curb--I don't check them inside; I check them at the curb; tipping is expected and I do so. And I tip at restaurants. And, the difference between those is--I think 3 of those are the same. I think in 3 of those--and those are the non-restaurant ones--the person carrying my bags up in the elevator with me, who unloads them, say, from the cart, the trolley, and puts them on a luggage thing; the person who cuts my hair; and the maid service at the hotel. I tip in all those situations; I tip the same amount every time. It has nothing to do, I would argue, with the service. There is a chance--if it were really horrific, I wouldn't tip. But, I don't think I've ever done that. And, in particular, I want to emphasize, I always tip the same amount. And the reason I do that is that I understand there's a norm of tipping, which is I understand there's a salary that's been set such that the compensation of the employee includes that tip; and I don't want to free-ride on that. I want to do my part and live up to that expectation. But, that's it. It's not to ensure promptness--which the acronym, allegedly--some dispute whether that's true--for a restaurant tip. But, a restaurant tip has all that nuance we talked about before. With those other three, not so much nuance. I get the same haircut from the woman who cuts my hair every time. She's fine; she's good; takes her about, literally, I think about 8 minutes, maybe 12. And, I guess if she took 40 unexpectedly, I might change the tip. But I'm not incentivizing her in any way. Or, almost in any way. In those cases I think I'm just living up to the social expectation that her compensation, or the bellboy's compensation, or the maid's compensation, they are divided into two parts, and one of them is expected to be paid by me; and I do so. Whereas, in the restaurant, if I get spectacular service--meaning a particularly effective or charming or helpful staff experience, I will tip more than 15%. In a bar, I'll definitely tip more than 15% because I think that's the norm. And, often, you might be fighting to get the bartender to pay attention to you, in which case I'm tipping there often because I'm coming back in about 7 minutes. So, it's very unlike the restaurant I'm visiting out of the blue. But, I think those are different. My claim is that in the restaurants we're heading toward that experience with the hair-cutter and the bellboy and the maid, because it's just pretty much the same every time. In which case, all those wonderful incentive effects you and I love and like to talk about, they are not really functioning. It's just sort of a norm that's become calcified.

Anthony Gill: I think that, in part, is true. But I want to interrogate your answer a little bit more, especially when it comes to the hotel service. While carrying the bags up to your room seems like a pretty simple task, the question is: Are you expecting to get service at other points in time? If you go down to the concierge and said, 'I'd really like to have a restaurant. Where could we go?' or, if you're having a difficulty carrying something or finding a room at a conference, somebody will go out of your way and help you--what I have found out is that word gets around on who the good tippers are and who aren't. And, so, when I tip a bellboy carrying my bags up, or the valet parker, I'm somewhat expecting--and maybe I'm overthinking this because I've been studying this for a while--that the word will get around that, 'Oh, Gill is a really good tipper. Make sure that he gets some really nice service there.' And there's some evidence of this because back in the old days when the bellboys would be taking luggage up to different rooms, if somebody got a tip they would actually mark the bag with a piece of chalk so that other bellboys would see this, and they'd say, 'Okay, if you didn't have any chalk, it's going to be a little bit harder getting to you and your service.' The same thing, too, is with the maid service. And, again, I was somebody who never thought about tipping the maid service, the housekeeping, at hotels. And then I was at a Marriott where they actually have a little envelope, and it was a very subtle [?] suggestion that you do that. And I thought, 'Oh, my gosh. Yes, maybe I should be.' And if I'm there a couple of days, especially if I'm at an academic conference and I want to come back early afternoon, 1 o'clock, 2 o'clock and prepare a presentation, I will actually see the housekeeping staff in the hallway and I'll say, 'Hi, I'm just leaving the room from here from 10-12. Could my room be made up by that time?' And, if I'm a good tipper, the room, I notice, gets made much quicker.

Russ Roberts: Yeah, I don't know about that. And, by the way, for those of you who don't know about this and would like to do it, you don't have to, of course. It's a norm that you're free to ignore. I don't think any hotel or maid is going to spread the word that you're a bad tipper at your next hotel, so it's a relatively low-cost free riding. But I always leave a dollar bill, or two dollars, whatever it is, under a water glass--it's clearer than as if I'd just emptied my pockets and left a dollar behind. I try to make it clear that I deliberately left it for the person. But, I think there's a couple of issues here. You remind me of a point that I did not make, which is: sometimes I'm a little uneasy about whether I'm going to see my bag again. So, [?] my car--you were talking about valet parking--sometimes I'll tip before and after, because I want to make sure that they take care of my bag or my car. In particular, if I'm leaving my bag at my hotel before I've checked out, or I haven't checked in yet, and they are holding my bag at the station there, I will tip beforehand because I want to make it clear that, 'Please don't break into my bag or lose it.' And, it's sort of my--it's a little bit of an extortion there, and blackmail--that's not a nice way to describe it, actually; I'm exaggerating.

Anthony Gill: People have described it that way before, though. Samuel Gompers, one of the union leaders early in the 20th century was writing about wages and noticed that there's all this tipping in the hotel industry; and he wrote to the effect that this is nothing short of extortion. So, many people have viewed it that way, in fact. One of the dangers of tipping--and I recognize this fully as a danger--is that if everybody starts putting their hands out for tipping, it really is going to discourage a lot of businesses. It's one of these norms that could be very fragile. If you try to ask for too many tips in too many places, it just might have a harmful effect on the norm in general.

35:22

Russ Roberts: Yeah. I've got to bring up a photograph I took a few weeks ago, because this is another piece of this puzzle we haven't talked about. Let's see if I can find it. I was at the Phillips Museum--yeah, I've found it here--which is in downtown Washington, D.C. They have the Boating Party, by Renoir; it's the prize of their collection. And they have a very nice exhibit--I don't know how long it goes till--but if you're interested in Renoir, or boating party art generally, you might enjoy it. So, I was there with my wife, and she checked a coat. And, I want to mention, by the way, that there are times I take my own bags up, because I don't want to deal with that interaction of the tip--not to save the money; I just don't want the person with me on the elevator, and [?] carry it. I'm happy doing it; there's something luxurious and pleasant about somebody carrying your bag for you--I mean, sometimes I might be in that mood. But a lot of times I'll take it up myself because I just don't want that interaction at all. So, at the coatroom of the Phillips Museum, there is a sign--because coat rooms are places that there is tipping sometimes, for the reasons similar to the bag, and as a way to prevent anything going wrong, sometimes people tip, and they tip as a thank-you after. But, at the Phillips it says--big sign, big letters: 'No Tipping. Thank You.'--I don't know why they're saying thank you for not tipping--'If you feel the need, please donate to the museum via the cash box near the entrance.' Which is a bizarro sign. The need I feel is to thank the person who handed me my coat in a pleasant way. But, it kind of makes my point, that they've raised the salary of that person high enough that they don't want us with that unease about the tipping, 'How much should I tip? Is it 50 cents? Is it a dollar? Is it $2?' And I think they just try to get rid of that social discomfort by saying No Tipping, and then to make sure people still work that window, they pay them enough to make it worth their while without a tip.

Anthony Gill: It's an interesting example, and there's a little bit of history behind the coat and hat checks that I've discovered that relates to this, is that I am betting the museum actually employs the person who is taking your coat and hat and umbrella. But, back in history, 100, 150 years ago when hotels became more popular, you actually had--the people who ran the coat checks were contractors to the hotel, and they would bid a price. It wasn't owned by the hotel. And so they were oftentimes making a calculation that, 'Well, if people tip us, I'm willing to bid $100 to be there, with the expectation that I might get $150-, $200-worth of tips over time.' So, a really kind of fascinating thing. It's a really East Coast thing, too: this is where the old hotels were, the grand hotels back in the late 1800s, early 1900s. out here in the West Coast, we don't even have hat checks. So, it's kind of an odd problem for me to experience to begin with. I remember when I was out in D.C. one time and somebody asked me if I wanted them to take my hat, and I said, 'No; let me explain to you about property rights.'

Russ Roberts: Never see it again, if you're not careful.

Anthony Gill: Exactly.

38:41

Russ Roberts: Just to finish this section up: I think, um--I think a couple of things. One is, I'd be interested in data which I don't have, and I don't know if you have, on the variation in tips across customers. There are people who don't tip because they don't know, in all these settings, either because they come from a culture where there's no tipping or they are not nice--they want to having to pay that amount. But my guess is that over time, the amount that people tip, the variance in it, has shrunk: That, a lot of people mechanically leave a 15% tip. So that's the first point I want to make. And then I'm going to make one more--and that would mean that this whole story is not that effective. There is some effect in quality because there is always the risk that you won't get tipped well. The other thing I want to argue--I don't agree with it, but I think there's an entangling of 'living wage', and, I'll never forget the restaurant I was in that said, on the bottom of the menu: 'We support the tipping system until a better one is found.' Okay. That's lovely. So, they want to let you know that they're against it, but they're stuck with it. But you could--a restaurant's alternative that we haven't really made clear is: they could pay a much higher wage--15% higher would be one amount; 20% might be even better. And I don't want to think of that as a 'living wage'--I think that confuses public policy with a restaurant's own choices, right? A restaurant is free to pay their servers whatever they want, within the letter of the law, of minimum wage. And of course minimum wage often, at least historically you would allow for servers--they had a lower minimum wage for restaurant employees because they understood that there were tips being paid. But you could pay above that; and then say, 'No tipping.' And the customer goes in there knowing that they don't have to tip--but then, as a result, their prices are going to a little bit higher because the servers are being paid more. And then the threat of losing your job is very high, because you don't want to lose that higher-paying job. So, a restaurant that offers a no-tip model and pays its servers more than the competition because they don't have tipping is holding the threat of being fired as the monitoring mechanism. And that could work. And I don't know--are there?--there must be some restaurants that don't have tipping, I have a feeling. Or where it's automatic.

Anthony Gill: Yeah, as we mentioned--5 years ago this trend toward no tipping took off, people were very excited about it; but it hasn't expanded very well. But, most of the places that I've seen with no tipping tend to be higher-end restaurants; they tend to be a little bit smaller, more boutique, kind of wine, and wine-bar kind of restaurants. And these are places that are going to have a higher-income clientele; they can afford to pay their servers a lot more. And, since the places are smaller, it's a little bit easier to do this. So, most of those restaurants are actually hiring experienced waitstaff who have been in the industry for 10 or 15 years, have a proven track-record, and you know, can make that choice of: 'Okay, I think working at Olive Garden now for 5 years I've really proven myself; I can really take up a job and I like having the security of having this stable wage.' It's places like an Olive Garden or a Denny's where you have a lot of first-time employees that are notfamiliar with the subtleties of the service industry where this becomes really important. And I think that signaling mechanism where, 'Yes, you are doing a great job,' or 'No, you are not doing a great job,' is very useful.

42:32

Russ Roberts: And just one more point. I was thinking about Uber. We've had a whole--I don't know, 40 minutes of a podcast without mentioning Uber, which of course is a perennial topic at EconTalk. Uber, for a long time, had no tips. They've now, with the exit of Travis Kalanick--a driver told me that he was really adamantly opposed to tips. I don't know how this driver knows this. But, driver told me that once he left, Uber put in the opportunity for a voluntary tip. Which of course tips by definition are always voluntary. But, they put it into the App, where it would say, 'Would you like to give a tip?' And, I wish that--I think that's unfortunate, as an Uber customer. And I think it's interesting that they decided to do that. Before this happened, the way I tipped my driver was by giving him 5 Stars. A tip is like a 6th star, but it's even better than that for a driver, because they get to spend it; and the stars just merely keep their job. So, I guess the existing management felt they would make the drivers happier even though it would make some customers less happy. It makes me less happy, again for the same reason: I just don't know, I'm not sure what the right amount is; they give you some options when you pull up the App--a dollar? $2? They don't--I don't think it's in percentage terms as the default. But, to me, part of the appeal of Uber is that I didn't have to think about that. But now I do. Because I don't want to do the wrong thing.

Anthony Gill: Well, I should say, 'Uh-oh,' here, because I was asked to write an op-ed piece for Fortune Magazine back in, I think it was May of this year--I think it was like May 20th. And almost exactly a month later Uber went and put tips on. I think the title of my article was why Uber should have tips. And then they went and did that. When I went and told them, I said to my friend, 'I got Uber to give tips, now!' They just threw tomatoes at me. It was a horrible thing. And I have to admit, I finally took my first Uber ride about a month ago, and I did 4 or 5 of them within a span of a few days. And I always engaged the driver, saying, 'Oh, what do you think about this new tipping thing?' And they--again, it's a very small sample size of only 4 or 5 drivers. And they all universally loved it. And I left my tip--not on the App, but in cash.

Russ Roberts: Well, that's another strategy. Yeah.

Anthony Gill: Yeah. I'm still an old person. I carry cash. And so--but, younger folks, I guess I find do not have cash. And so, having the tip on the App is important there.

Russ Roberts: Yeah. Cash is an unexplored topic by economists. But, when I was trying to get tickets to Les Miz [Les Misèrables] when it opened in 1985, I think it was--and I've told part of this story on EconTalk before--but I was trying to get somebody to sell--I was trying to get a ticket. It was sold out. And my wife and I showed up at the theater about 10 minutes--for reasons not worth going into--about 10 minutes before the show was starting, thinking, 'Well, at least we have a shot at getting a scalped ticket.' Couldn't get anyone to give me one, sell us one. Well, that's not true. There was somebody who wanted to sell us one for, I think, a huge amount of money, in two separate seats and not connected to each other and we said no. But, there was a--one while we were standing there who clearly was waiting for someone who hadn't showed up yet. And I took out--I think this, this was 1985, I think I took out $120, in cash--6 $20s--and held them up in her face and said, 'Your friend's not here.' I verified that she lived in the city; and I said, 'Take your friend to dinner when your friend shows up, and I'll go see the show'--because this is my only time to see it. And she snatched the money out of my hand with great zeal, thrust the tickets on me; and my wife and I got to see Les Mis, which is really fun. But I always thought the visceral role that that cash played may have helped. Of having it be visible. It turned out, by the way, they were student tickets--which is probably illegal, by theater, by the rules of the theater. We ended up using student tickets that she had paid, I don't know, $10, for, I think. So, she had a very nice dinner and came back and probably got those student tickets another time or it worked out very well.

Anthony Gill: You certainly benefited in the gains from trade, there. And I think only a trained economist would have been able to do that.

Russ Roberts: Yeah. Right. I didn't feel--other than the fact that they were in the last row of the theater and next-to-last row, I didn't feel any disappointment that I had paid much more than she had paid. I was very happy to see it. And when it was over I was even happier--it was one of the most exhilarating theater experiences, artistic experiences of my life. I found it just an amazing show, the first time.

47:24

Russ Roberts: But, let's move on, in fact, to tipping. Let's talk about price discrimination. I don't that understand that argument in the paper. So, what's the argument there.

Anthony Gill: So, this actually connects to what you just said. In fact, you were very excited to going to the Les Mis show, and you flashed out $120 and the student there had only paid $10 for it. So, those tickets, those assets, were actually being allocated to its higher-value use. Behave, verily, for the gains for trade--we all celebrate as economists because this is something that we want to see happen quite a bit. And this is what I'm arguing here with price discrimination. Now, price discrimination is about trying to figure out who is going to share more of the gains from trade that actually occur. And I love this topic because I tell my students who want to be entrepreneurs that, you know, it's fun to think of all the different ways that somebody's reserve buy-price is--the highest price that they are willing to pay for this--and then try to get that amount shifted to you, and the gains from trade. But, understanding that people have different preferences. Some people have very high reserve buy-prices. Other people have very low reserve buy-prices. And this factors, I think, into the discussion of tipping, because it allows--if you shift some of the responsibility of payment for the entire restaurant experience to the customer, you are able to capture individuals who have very low-reserve buy-prices. And may not be big tippers, but also still attract people who might be big tippers, and those people are the ones who give 20, or 25% here. Start with the basic idea here that one of the biggest problems that any restaurant faces is empty tables. It's just a deadweight loss there. And if you're a manager at a restaurant and the tables are not filled and you still have to have waitstaff waiting, just in case there is a rush that comes in, there's a lot of uncertainty there. You need to fill those up. And one of the ways to fill those up is to keep your prices as low as possible so that you can find customers that might not want to pay a whole lot, and have them fill in the seats. Restaurants do this a number of ways. They have senior citizen discounts because us old folks like to eat at 4 o'clock in the afternoon and get to bed by 8 o'clock. They might have Happy Hours for individuals coming by for work. But I think another one that kind of focuses in here is tipping. In that, there's a certain set cost that the restaurant has to pay--the food price, the ingredients, the rent, the electricity for the ovens and all that kind of stuff that they have to pay. And those are pretty fixed costs. It would be difficult for them to manipulate. But the service, as we talked about before, can oftentimes be customized, here. And, it's beneficial for the owner of the restaurant to say, 'Listen. Here's a norm in society. If 15% is expected, or perhaps 20% is expected, but if have a really good time, if you love the service, please feel free to give 25%'; If the service is not good, then you might have to give less. That's the principle-agent problem. But, by allowing the customer to decide what they're going to pay for their, the service that they get, you can separate out customers who are very gregarious with their tipping. I'm one of these people. I love to tip; and if I get great service, it's going to be 25%. So, they want to attract me. But they also don't want to discourage individuals who are not big tippers. Maybe they say, 'I only think people should get 10%.' Whereas, the waitstaff may not appreciate those folks as much, the owner does like to see them sitting at the tables, especially when the alternative are empty seats. So, for that reason, the restaurant wants to keep these, the base price for the entire experience, fairly low; and then let the customary, kind of, what I call voluntary price discriminate, based upon this social norm. And I, the more I think about that, I think it's a kind of a very cool idea.

Russ Roberts: Yeah--I don't understand--I don't agree with it, I guess. I was going to be very polite. I said I don't 'understand' it. I actually don't--it's worse than that. I don't--to be honest, I don't agree with it. I think for a couple of reasons. First of all, I take the point about the fixed costs. We talked about that a little bit on EconTalk. And I think, that's take out. So, if I want no service, I have an option--called take out.

Anthony Gill: Right.

Russ Roberts: And the restaurant prices that differently. And that, by the way, is another way that the tipping helps change the price. Although, there are other ways you could solve the problem, obviously. But, you don't--I think what you don't want is--let's say--here's the problem. You could argue that people who don't want much service than people who want a lot of service. And the people who want a lot of service, they are going to tip more than people who want a little bit of service who are going to tip less. And that's great, because they don't use as much of the waitstaff. The real problem is that the tip isn't related to how much service I get. It's related to the quality of the service. And as you pointed out before, there are people who don't want to interact much with the wait staff. And I'm going to give them a big tip. I'm not going to give them a small tip. So, I don't see it as capturing my demand for service. And, the other problem I have--what's the other problem I have? I'll let you answer to that and then I'll think of my other problem.

Anthony Gill: Well, let me try to present this in a way where a restaurant goes to a no-gratuities model. So, let's say that the average price of a meal is, let's say, $20. And you have different people, some people who value service--and they could value different service. The service they can value is 'Please leave me alone. Leaving me alone is really great service.' But other service might be, 'Yes, please talk to me and tell me the interesting things going on in town.' And again, that can vary by individuals and time. So, some people are willing to pay for that differences in qualities of service. Okay, so we have a base price of $20 for the meal. But, then, the rest--and then allows for tipping. Then, the restaurant decides to say, 'Okay, we're going to end tipping, and we're going to add additional costs to the meal'; and it might, when it all is said and done, adds another, let's say, $2.50 to the meal. That might be enough of a difference that it chases some of these people who are not very service-oriented--whether it be very-good service or leave-me-alone type service--away from the restaurant. They were coming in, it's sort of a $20 meal: 'I'm willing to give a dollar, $1.50 tip. Now it's $22.50 that I have to pay. Boy, I can't just do that any more.' So that chases those individuals away. The problem for the restaurant owner is they don't know what the mix of those customers happens to be at any given moment in time. And so, they want to try to hit the lowest reserve price they possibly can, and then shift the ability to decide, 'Do I want to share more of the gains from trade with the waitstaff or not?' to the customer.

Russ Roberts:

54:47

Russ Roberts: Yeah. I don't think that works. The reason I don't think that works is that if I come in for my $20 meal, and I don't tip, then I'm not covering the cost of the wait staff. And so I'm free riding on that. And that ends up being paid either by waiters and waitresses quitting, and high turnover on the part of the restaurant. The restaurant doesn't want that. I mean, that's a disaster. And in fact I would argue that the people who tip poorly--as you point out in the paper, they are going to have, if they become known as poor tippers--and that obviously is going to be a different scenario when you have repeat customers versus one-time customers. If you have repeat customers who tip poorly, they are going to draw less attention from your wait staff. Which is not a good thing, from the owner's perspective. Unless you want to argue that, 'Well, they are not really willing to pay the full cost of the meal, which is in fact $22.50.' Right? If the meal cost $22.50 because $20 of it is for everything else and $2.50 is to cost for the time of the waiter or waitress, then the person who gets away with the $20 is just, is taking money. And I don't want that customer. I don't want that customer--if that was common, you'd have to get rid of tipping. Because it wouldn't--the system would not be effective. I think that's the flip side of people, of doing the monitoring for you. It's not just doing the monitoring. They are also keeping the waitstaff happily employed.

Anthony Gill: Right. And I would agree with that. If you have a customer who comes in repeatedly and doesn't cover the cost of the food, beverage, and the service, that customer can be rather problematic. And if you, if that's the bulk of your customers that's a disastrous model for you. But, the question is: To what extent are these just occasional diners that come in? The person who doesn't tip and cover the cost of the service maybe once every 3 months or so may not be that big of a problem in terms of your labor cost, but at least you are still filling a table.

Russ Roberts: Yeah, I take that point. I think that's--I think that point--in which you'd want to have, you'd have to argue, for that to be true, that you'd have tipping in quiet times or different kinds of encouragement, different norms for tipping maybe in quiet times. I don't know.

57:12

Russ Roberts: I don't want to miss our conversation about tipping in places you never expect to come back to. So, let's move on to that. Let's talk about why is it--and I certainly have done this numerous times; I suspect you have done this, too: Why is it that people tip in restaurants they'll never come back to, cabs they'll never be in again? And of course many people listening to this would say, 'Only an economist would think this is a puzzle.' But, go ahead.

Anthony Gill: Yeah, it seems like such a horrible thing. But I think only an economist who hasn't read Adam Smith's The Theory of Moral Sentiments would think that a problem.

Russ Roberts: Yeah, that's my man.

Anthony Gill: Your favorite book. But, because we always have that impartial observer sitting somewhere in the background wagging our finger at us if we're not obeying social etiquette or something. The argument I make here--and this is a perennial problem. Let's restate it so that people understand it. So, that, if I'm driving across country and I stop at a roadside diner that I know I'm never going to come back to--they charge me $10 for a meal and are expecting a tip--well, I don't have to leave a tip because I'm not going to come back so I'm not expecting future service. And I paid the tip at the end of the meal and so everything is said and done by the time I pay the bill. So there's no reason I should pay a tip. But we know that lots and lots of people still tip. And the argument here is because that's how we were taught, growing up: that that is what you do. That's what kind people do. That's what we do here in the United States. It's a very important norm. The question then becomes: Why is this the norm? It just seems so odd. And, one of the areas that I think economists have not paid enough attention to is this question of norms in society. There are rules, there are social etiquette or manners that allow us to negotiate between individuals--the space on a bus, whether you get in front of a line, whether you hold the door open for older people or not. Those are important things that we do on a day-to-day basis that--you know, establish reputations between individuals. The argument I make here is that, as market economies grow--and this goes back to Adam Smith's specialism is important for an economy to grow, but you need to expand the market as specialism increases--but as markets expand, trade becomes more anonymous. And as trade becomes more anonymous, I start to worry about whether or not I know the intentions of somebody else. And if I'm very nervous about whether or not somebody is going to fairly trade with me--that they are going to give me the product that they specify, the quality that they specify--I might be very reluctant to do that. And so, I think that society has developed a number of norms of signaling trust throughout society to enhance the ability for anonymous trade. Now, this gets real fuzzy. This is not something that can be easily modeled saying, 'Well, who is the person that first decided?', that, they consciously decided, or what are the actual mechanisms here? It gets a little murky. But I think we have a number of these different types of moral codes: Gift-giving is another one. And I study the economics of religion, earned sacrifices or burnt offerings that signal that I'm willing to pay a very high price to join your club, to join your religious organization, or to give you a gift because I want to show you that I care. Because, in the future, at some point in time, I hope that we have a fruitful relationship. We engage in trade. We sit down and enjoy each other's company. So, I'm willing to burn some resources. And I think that's what tipping, in part, represents: that you burn some resources when you really don't have to, to signal to the rest of the world, that says, 'Hey, I'm a pretty good person.' And if everybody else does that, I'll know that everybody else is a good person. And so, that will just make our future interactions a little bit easier. Now, does anybody go through that calculation in their head when they are leaving a tip at a roadside diner? I don't think so. But this is one of these things that your parents taught you. They taught you at school; and your friends and colleagues oftentimes teach you. And I ask my students, when they get a little bit skeptical on this kind of argument, so, 'Is that really what goes on?' I say, 'Well, if you go out on a first date, and you are thinking about: This person might be my future spouse and living with them for a long time'--and we go to a restaurant; and the person doesn't tip very well. What does that tell you? And people go, 'Oh, yeah, I wouldn't go out with that person again?' Well, it tells you that, yeah, they are a little bit cheap; and they are willing to cut corners at times. And, you know, some time in the future when the going gets rough, I don't want the person who is going to cut corners. I want a person who I know I can trust. And I know that my own personal story is when I went out on a first date, with a very nice lady; and I pulled out a coupon to pay a meal. And that was the last time I ever had that date. So, um, yeah, that I ever dated that person. So, these things are very subtle. And they are kind of woven into the fabric of our society. I don't know how these things get started, how they are perpetuated. Interesting thing to think about. But I think there's something to it, there.

Russ Roberts: I think the right word there is opportunism. If you act opportunistically, you are sometimes considered clever. 'Wow! You avoided having to pay the tip!' But, that's not a characteristic I want in a spouse. It is someone who will think of themselves over the person across from, right? And I think the key part of the impartial spectator and the norm of tipping at a diner is that, 'I saw that person's face. I interacted with them as a human being. And I know they expected a tip. So, yes.' I could, happily--or actually not in my case--but one could actually happily not leave a tip and feel smug and smart, 'Wow, I did the profitable thing. I avoided that extra charge and now I can drive down the road and have more money for something else.'

Anthony Gill: Like Econ 101 taught me

Russ Roberts: Right. Exactly. I'm maximizing my utility. Leave me alone.

Anthony Gill: Yeah.

Russ Roberts: But, I saw that person's face, and although we didn't talk about it beforehand, I know that there was an expectation that I would live up to my side of the bargain. They lived up to their side of the bargain. They brought the food. They smiled. They did all the right stuff. And, of course, they are not really working for me. They are working for their employer. But they are working for me. And I didn't live up to my side. Now, some people can get to lighten that. But I would argue as Adam Smith would they don't have so many friends. Having said all that, having said all that, I would suspect that people who work in roadside diners that get a lot of transient traffic might have slightly higher wages. Because the average tip will be lower. So, it doesn't work perfectly. I always want to emphasize that point.

Anthony Gill: No, I think that's true. And it would be an interesting study to conduct, the places that have much more transient type of restaurants, customers, than, say, the local, neighborhood diner where everybody knows your name. I think that would be the case. You'd also have to control for a lot of things that many of these roadside diners are in places that having lower living standards, etc., etc. So we'd have to put the denizens of regression analysis to work for us.

Russ Roberts: Yeah, lower rents to cover, to track people who live there, yeah.

Anthony Gill: Exactly.



COMMENTS (61 to date)
Jim Bang writes:

I've thought of many of these issues with tipping from time to time. I think that a transactions costs approach is a good start, and one thing we have to think very carefully about is what the tip represents, and why it helps the owner.
It doesn't help with monitoring much, since if the service is not very good, the customer will complain, or sometimes give positive feedback, on a particular server. The owner doesn't need to observe tips to know that.
Tipping seems to me to be similar to why any worker might receive a percentage of the revenues they generate: because the boss wants them to sell. What do you both think about tipping as just a commission to upsell the ticket? This explanation works even if tipping is not to sensitive to the service or attention paid by the server.
Tipping also creates a huge problem of respect given the gendered nature of waiting tables. Would there be something to reforming tipping from being a discretionary commission paid by the customer to one paid directly by the owner?

netcan writes:

This may be one of the questions that you shouldn’t ask an economist. :) Anyone else would have started with the Quentin Quentin Tarantino’s Tipping dialectics from reservoir dogs.

Joking aside, I think Tarantino had his eye on good questions.

The anti-tipper is concerned with consistency. "I don’t tip at mcdonalds. They work hard. Why is the waitress different? If she should get more, let the owner pay her."

The pro-tipper is appalled. “Waitressing is one of the last jobs left where a single mother can earn a decent day’s wages! You think you can feed a kid on McDonald’s $8.40 an hour, as—-le?!!”

I think right there are questions that don't make sense to economist, at least easily^. Everyone else will tend to ask “do you earn more that way?” Economists will tend to think "why does anyone tip?"

Anyway, I think the answer to the first is a surprising ‘yes.’ I was a waiter when I was 19. We all knew that a good waiter could earn more waitering than at other available jobs, and that was definitely because of tips. Delivering food is also good because of tips.

We also knew that pretty girls earn a little more. At the place I worked there was a 40+ single’s night that worked out better for the pretty boys. These questions were of interest to us. No one ever thought "why do people even tip?" or "what problems are being solved by disintermediating." That a pay structure could affect pay to such a degree seemed intuitive. It's just like how an executive at a software company of telcom knows that subscriptions and one off prices can affect revenue from identical products (now services) as if customers can't do basic arithmetic.

I enjoy the pondering about tipping vis-a-vis solutions to the principle-agent issue of steaming hot french fries. Trying to puzzle out how hayekian price-information flows through a diner more efficiently. How tip-pooling might affect things…

Ultimately though, in this case.... I’m with Tarantino, probably. If you let people pay the waitress what they think she deserves, it can work out much higher than “market rate,” if the market was a normal salary market. I also think $8 + tip seems cheaper than $9.20.

Russ, you taught me that Adam Smith was a moral philosopher, and cultural observer. I think that’s the more applicable logic here, a cultural logic.

An economist will ask “why does anyone tip at all?” That’s the curious question to them. To a non-economist “because that’s how they make a living” is the obvious and logical answer. I think Adam Smith would have been OK with this answer. It makes cultural sense.

^This is all tongue in cheek. Economists are hyper-aware of these issues. Any economist I ever met tells that joke about searching under street lamps at least once a day. Russ’ intellectual honesty is genuinely admirable. :)

Anthony Gill writes:

netcan writes: "Ultimately though, in this case.... I’m with Tarantino, probably. If you let people pay the waitress what they think she deserves, it can work out much higher than “market rate,” if the market was a normal salary market."

This is what I was trying to get at with the argument on voluntary price discrimination. In the aggregate, there may be a "market rate" for what a waitress can make, but individual preferences of customers differ from that single "market rate." Some people highly value attentive service and will gladly pay more for a waiter who can pick up subtle cues. However, it is difficult for a restaurant owner to know who those individuals are in advance. It would be nice to know everybody's reserve price, but we don't.

Enter this nifty little custom of tipping X% +/- a little bit. The customer gets to customize how they divide up the gains from trade with respect to the service provided. Let us say that I am somebody who really values good service (perhaps I'm in a rush to get to the theater and want promptness). My reserve price for the total restaurant experience (food + service) is $50 and the meal provided to me comes to $40. I could leave the standard 15% tip and pay a total of $46. But if the service was exquisite, the fuzziness in the norm that allows people to reward good service even more may prompt me to leave a $50 bill and not ask for change. Gains-from-trade are realized with the server getting the majority of the surplus. (Along the way, we also provide a solution to the principal-agent problem.)

This isn't price discrimination in perhaps the textbook way we think about it with a seller having some degree of monopoly power, but I do think it still holds here. There is a cultural norm that, perhaps through the mechanism of "guilt" or Smith's "impartial spectator," that allows the customer to set different prices for service based upon their (unrevealed) reserve prices. I will admit that this isn't a standard Textbook 101 application of price discrimination, but a strong cultural norm can serve as a way for a supplier (restaurant owner) to tease out the different reserve prices for service. [I should note that some bakeries like "Panera Cares" in Portland not only do this for service, but for the muffins and cookies they sell too -- they leave it up entirely for the customer to share whatever in the gains from trade they want.]

Of course, I could also leave less if the service was not up to snuff, which by the way is a kind thing to do for future diners; consistently poor tips might have the effect of telling poor servers to leave the industry and find work elsewhere, which should have the effect of improving the service in the food industry (or the Pizza Industrial Complex) overall.

Of course, this still leaves the puzzle of why I would want to share any of the gains-from-trade if I am not required to by contract. That is the story behind why I would leave a tip at a restaurant that I would never return to, and also why we give gifts instead of cash to one another at holidays, and why we often engage in sacrificial behaviors (e.g., "burnt offerings) in various circumstances.

I hopefully explain more of this at my paper that I believe is now available at my SSRN site.

Jeremy writes:

Thanks again for another interesting podcast. Below are a couple of comments.

If tipping provides information on the quality of service, what is the impact of technologies like Yelp or Google Reviews? Is the information value of tipping slowly diminished due to the existence of alternative methods of providing feedback?

What about businesses which have mandatory services which require tipping? For example, there are hotels with valet services and no self-parking. In this case, the tipping experience can be stressful given the relative expense of the personal asset and the lack of a reference price for the service ('park my car without damage').

Also, you typically need cash-on-hand for most tipping. At the same time, finance and technology companies have been working hard to make every transaction more electronic and seamless (mobile payments) which seems to reduce the human connection of leaving a tip. For example, Square and other payment services require a quick tap (ex 10, 15, 20, 25%) to leave a tip and you're done. The server may not even see the amount tipped. This can make the process feel more like a ritual/reflex versus something which is variable and based on service. Is this a trend which is also eroding popular support for tipping?

Sam writes:

One issue you guys never tackled regarding tipping is competitive pressure.
If one restaurant forgoes tipping and then charges more for their entrees, then their menu appears to be more expensive compared to their competition. If someone in NYC is walking along a sidewalk comparing menu prices at the nearby restaurants (or on Yelp), than the restaurant that has foregone tipping and included the cost in the price appears more expensive.
This is ok if all or most restaurants do this, but who goes first? It becomes almost a game theory scenario.

Dr Golabki writes:

Few things:

1. I've definitely stopped a lot of tipping (cleaning hotel rooms, carrying bags, checking coats etc) because I never have dollar bills anymore. I think that norm is going to disappear because people born after 1975 just don't carry wads of singles around. Sorry to any bell hops on the thread!

2. Anthony and Russ disagree on the benefits of price discrimination from tipping. I tend to side with Anthony. The tipping system is similar to charging 20% more to everyone, having no tipping and then giving a 10% discount to bad tippers. If you think bad tippers are more likely to be very price sensitive on the full meal cost (which seems likely to me) then tipping let's you specifically target your "discounts" to the population where it will drive the biggest impact on volume. It's an analog solution to the same problem Google and Facebook are trying to solve with data based targeted advertising. Russ is right that there's a point where this wouldn't work, but I think most restaurants have a much bigger problem with empty tables than with too many tables getting 10% discounts during peak hours.

3. This reminded me of a This American Life Episode (link below) in which they discuss tipping and conclude that (1) quality of service does not actually correlate with tip size, but (2) the wait staff still acts like it does so some of the benefits of tipping still hold. I find this at least as plausible as the idea there there's real valuable information in average tip size.
https://www.thisamericanlife.org/radio-archives/episode/245/allure-of-the-mean-friend?act=2

Robert Herreid writes:

My son and daughter recently closed a restaurant in Puyallop, Washington. Major reasons were the increase in the minimum wage; waitstaff get the full minimum wage PLUS tips; restaurants have to pay taxes on their employees tips; and it's illegal to share tips with the kitchen staff. So ..trained chefs earn well below $20/hr. and waitstaff earn more than $50/hr. The public almost always pities the poor waitress and never hears much about the hard working chefs and kitchen workers. They actually hurt their financial position by turning out better food that results in better tips, which result in more taxes for the owner to pay (on money they never received). Until the restaurant is out of business.

Anthony Gill writes:

Jim Bang writes: "It doesn't help with monitoring much, since if the service is not very good, the customer will complain, or sometimes give positive feedback, on a particular server. The owner doesn't need to observe tips to know that."

I would disagree with this in light of ye olde "exit option" (hat tip to Albert Hirschman). If service is really, really bad, people will likely complain about it. They may even fill out those comment cards on the table (or head on over to Yelp). But if the service is just a wee bit bad or "off" a couple times in a row, most people don't want to get tangled up in conflict or potentially jeopardize a server's job, but they do stop coming to the restaurant, or come less often. For the owner, the reduced attendance at the restaurant could be due to a number of different reasons and they wouldn't know whether or not it was for marginally poorer service than in the past, or the previous diners might have been laid off and are eating at home more.

And when it comes to restaurants that one never returns to, why would any customer take precious time to seek out the manager and talk about the fact that the service seemed a bit too slow?

And as for great service, how many of us take the time to hunt down the manager to praise the staff? If it is exceptional, then maybe. But if is "pretty darn good" and you are in a rush to the theater, you probably won't do that. Also note that people tend to complain more than praise (as witnessed by the ratio of complaints/praise on sites such as Yelp!). A quick reflection: How many of us actively praise more than complain when it comes to various services we receive? (Admittedly, TripAdvisor often has a higher percentage of "praisers." An interesting topic for study!)

Tips provide direct feedback to the person who has the most "skin in the game," which is the wait staff. Yes, the owner has a stake in this as well -- repeat customers, good word-of-mouth -- but the floor staff feels the direct impact right away.

Anthony Gill writes:

Sam writes: "If one restaurant forgoes tipping and then charges more for their entrees, then their menu appears to be more expensive compared to their competition. If someone in NYC is walking along a sidewalk comparing menu prices at the nearby restaurants (or on Yelp), than the restaurant that has foregone tipping and included the cost in the price appears more expensive."

This is a GREAT observation and may be why the "no gratuities" model that was supposed to sweep the restaurant industry never really took off. And it does have a game theoretic structure in that it might well represent an "assurance game." I have been thinking about this a lot in terms of norms. Norms work best if everybody (or almost everybody) shares them. It doesn't matter if it is Norm A or Norm B (or Norm at Cheers), so long as most people are coordinating around either A or B. The frustration comes when half of the folks are in Norm A (e.g., tipping) and the other half are in Norm B (e.g., no tipping).

By the way, this is why I think that there was support among taxi drivers to make sure that Uber accepted tips. Yes, taxi drivers would like Uber to go away, but if it is going to stay, the "no gratuities" model that Uber used to employ might damage the income of taxi drivers who "normally" (and I used the term "norm" there) expect tips. If you have some hipsters using Uber and become used to no tipping, but then have to use a cab instead of Uber for some reason, they are probably not going to tip the cabbie.

I have been writing some other pieces on how norm coordination is important for society and may cause conflict if norms start shifting -- the uncertainty that arises when not everyone is coordinated around the same norm can cause confusion, less trust, and possible conflict.

Anthony Gill writes:

To Dr. Golabki,

1. The lack of "cash in pocket" definitely is causing changes in the industry, and I would imagine this will change the way coat checks are done. (Interesting note: The Segrave book mentioned in the podcast talks about how coat checks in the early 20th century were run by contractors, not the hotels or restaurants, and they would hire staff that would exclusively subsist on tipping. Also, in the mid-20th century, wait staff in France would actually pay a fee to serve in restaurants and then their only income would be tips. I never knew this and found this on p. 49 of the Segrave book. Wow!)

Interestingly, the "no cash economy" is also affecting how churches bring in weekly tithes. More parishioners now sign up to give a weekly gift to the church through an electronic transfer, which helps to smooth out church income over the year.

2. Thanks for the support on the price discrimination point. I still think I'm right, but Russ is a pretty smart guy and wrote an interesting piece with John Lott that I cite in the paper. The paper is now up on my SSRN site.

3. I think the reason that quality of service and tipping may NOT correlate as closely as one might expect is that customers have different reserve prices for service. An assumption of a high correlation rests upon a uniform preference for service. But some people (or the same people at different times) value service more than others. I may or may not be related to income. It may be related to circumstance. When I want to get to a movie on time, I do value prompt service and reward accordingly with a big tip.

In some instances, you may have an individual who doesn't value service at all -- they are just there for the food. However, the service at the restaurant is superb because the server doesn't know if the diner is a good tipper or not until after the service has been delivered. Indeed, it may well be that the lack of correlation between god service and tipping is an indication that tipping is doing its job in solving the principal-agent problem! If service is consistently good, and people have different reserve prices for service, the variability in the tip ratio will be high and wash out any significant correlation. This could be a point for an empirical study. Who's in on that?

Mark writes:

I feel like the social norm aspect is much more important that most other factors discussed. If the social norm is very strong, most people will tip 15% but it will take a larger deviation from normal service to tip something other than 15%. This would minimize the signalling aspect of the tip since a large variety in service would result in little change in tip. Alternatively, if the social norm is very weak and most people do not tip a standard rate, then how can a server know if the tip was meant as a signal or is within the normal variation of tips?

I also would think it would be interesting to see how all of the problems that are supposedly solved by tipping are resolved in countries that do not tip. Is service, on average, any better or worse in non-tipping countries?

Anthony Gill writes:

Good points, Mark.

If the norm is strong and, I would add, automatic, then it does lose some of its signaling strength. So does a 15% tip really tell you anything at all?

However, if there is a range of tips with an expectation of 20% or more being for exceptional service and 10% or less being for poor service, then the range does allow for signaling to occur. That small percentage difference might not be a big deal to the actual customer (as it only is a few bucks), but to the actual wait staff it can amount to signicant cash over the long haul. If one exceptionall good waitress makes 3% more in tips than somebody else, over the course of several months that does add up.

Second, if the norm is weak, or facing pressure to change, the norm also loses its signaling capacity.

But there is a third issue here that involves the evolution of norms, which I consider to be fascinating. It may have been at one point in time that the norm of tipping had a fairly broad range and, as such, had a strong signal. However, over time the norm may have become very mechanical. If so, then the norm is losing its ability to solve principal-agent problems. It may be that the "no gratuities" model is a response to this, but may be too early to tell. The evolution of this norm may perhaps be affected by the "tip calculators" on our smart phones and less cash in our wallets. If we can calculate the exact 15% tip and write it on the credit/debit card receipt, the range may shrink.

On another note, it is interesting to note that the taxi and Uber rides I've taken recently have provided three tiers of tipping (10%, 15%, and 20%) as well as an optional "write-in." This seems to be a way of preserving the signaling aspect of tips. I remember even seeing this at a couple restaurants I've been at.

And on one more note (I sound like Columbo here), when I was writing about this, somebody mentioned the famous Alchain piece entitled "Uncertainty, Evolution, and Economic Theory" in Journal of Political Economy (1950) wherein he notes that we follow economic logic even though we may not be conscious of that logic explicitly.

And finally, I think you have a great idea for a cross-national comparative study on ways of solving principal-agent problems.

John Pinkerton writes:

Typically we ask, "Why there is tipping?" We might also ask, "Why is there not more tipping?"

The optimal level of service may be "good enough" rather than "superb." Maybe the worse server has the comparative advantage. We want the high school student who's not that good to stay on the job and we want the amazing moonlighting recent law graduate to move on to better work.

This would explain why people who don't care that much about service would give a flat percentage regardless of quality. Certainly some restaurants pay lower wages rather than fire lower performers.

Ian writes:

This may have been addressed and I missed it, but there's another reason you might tip even at a restaurant you never plan to go back to: fear of public shaming. Especially in the age of social media. A public Facebook post with your picture and the caption "BAD TIPPER" (and maybe your name if you paid with credit card) could be pretty damaging to your reputation.

Now, merely not tipping might not be enough to warrant such shaming, but maybe you were also a little rude to the wait staff without realizing it.

Perhaps this fear is another reason why the distribution of tips has narrowed (if in fact it has).

Ross Emmett writes:

We had an unusual experience once at a 16-person conference. Dinner one evening was scheduled at a restaurant, but when we arrived, only two of the tables we were scheduled to sit at were free. The third had a young couple sitting with empty drinks staring into each other's eyes (I kid you not!). They continued to sit there for over an hour. No other table was available.

Two of our tables were free and 2/3rds of our group sat and began to order. The other 1/3rd of our group (incl. me) stood and waited for the young lovebirds to move. The house manager would not ask them to leave, despite the fact that we had a reservation.

We discussed our options while we waited, and again while we sat, finally, at our table and tried to eat quickly so we'd be done about the same time as the rest of our group. We didn't want to refuse to pay the bill for our meal, so we decided not to give any tip. We realized that the likely outcome was that this would penalize the waiter for something that wasn't her fault. We went to the restaurant manager and told him that we weren't paying a tip, but that we expected HIM to pay the wait staff a tip because it was HIS FAULT that we waited for over an hour for the table when the rest of our reservation was fine. We never got a straight answer, and I expect the wait staff was stiffed.

What would you have done?

Robert Herreid writes:

Waitstaff have very little "skin in the game" compared to owners who are probably risking all of their money, or chefs who have culinary skills bought with time and money. Owners get no benefit from higher tips except the honor and better retention of waitstaff. Tips are considered wages of waitstaff and owner has to pay taxes on them. Since February 2016 tips can't be shared with the people who prepare the food (Dept of Labor).The higher the tips, the less money the owner has to pay the kitchen staff or to recoup his or her investment. New York restaurateur, Danny Meyer, decided to try no tipping in some of his restaurants when he started to lose trained chefs to the greener pastures of fast food restaurants. In cities with many high end restaurants, people with law and medical degrees are reportedly choosing to make hundreds of dollars a shift as waitstaff. The popular narrative of poor single mother scrapping by on tips is deeply held. Also the one that tipping for a delicious dinner benefits the people who prepared it. Neither is true. Fine dining is a drama between diners and servers. Too few of either show much consideration for the owners and kitchen staff. The public wants more and more protection for the show out front and has less and less appreciation for the people in back who create the reason for the show.

Jerm writes:

I am a regular at a bar/restaurant in a mall. High traffic. High turnover. High percentage of patrons from non-tipping countries (I was told that, before sunset, it's probably about 50% tippers and 50% non-tippers). The servers keep all their tips. No pooling tips between the servers. No sharing tips with the back of the house.

There are a bunch of regulars, all of whom tip well over 30%. But mathematically, it's not that big of a deal to the servers. Our monetary contribution is not a big percentage of their total.

What I've been told is that our real contribution to their quality of workday is that we are regulars. We come in and sit down. We order the same things at familiar rhythms. And they can stop worrying about one corner of their section and focus their energies on the unknowable remainder.

A lot of the tipping research and economic opinions seems to hinge on this transaction being relatively impersonal, which I think is missing a big part of the story. It only took three visits for me to become a known regular, which surprised me at the time. Even in an environment where a server will have 50 customers in a 4 hour shift, my face became familiar well before my tipping habits ever entered the equation.

I've also worked at retail stores with those comment cards. And the general rule for "service that's good enough for everyone to get their bonuses" was a 90% rating. That's positive comments MINUS negative comments, so that's actually 95% positive comments. Most people who fill those things out say good things. It wasn't unusual to get close to 100% in a month.

For tipping (and those comment cards), SO MUCH rides on the number of observations. For a worker who gets a large number of customers, the numbers will settle around their expected averages. But for workers who only get a few data points, there's more of a reason to fret over a table full of teenagers or a bad Yelp review.

I'm surprised that a hotel maid would notice or care about whether or not a guest tips or not. They only get 15 minutes per room, and unless it's something waay out of the ordinary...I don't know if it would even register.

From what I've been told, the best "bang-for-your-buck" person to tip is a flight attendant. A couple of fresh pastries in a paper bag could make the entire flight crew think favorably of you.

Michael Byrnes writes:

This might just be me whining, but I'd rather see tipping gone because I find it stressful. I mean, it's not stressful at a restaurant in the US, where I understand what the norm is. But there are so many services/contexts I don't use that often where, at first glance, a tip might - or might not - be appropriate. And, assuming a tip is warranted, I have no idea what the norm is. I can't help but think that for many services where tipping is expected, the cluelessness of customers lowers the signal:noise ratio considerably. (That noise could be from a customer who doesn't tip, not knowing one is expected, or from one who tips high for bad service, not knowing the norm calls for a much lower tip even if the service is terrific.) On top of that, I worry that, if tipping gets one extra consideration, not tipping in some context might have the opposite effect (i.e., deliberately poor service). That's kind of a hostage situation. I guess all of this can be filed as sort of a non-pecuniary cost of tipping that might tend to be underappreciated in some of the analyses of the practice.

Having said all of that, I liked this episode and the guest, and I wouldn't necessarily disagree with anything he and Russ said.

Jerm writes:

Ooh, also...

The coat check at a museum might be a "NO TIPPING" situation if the people manning the coat check are volunteers. Because none of the other volunteer positions are tipped, it would make the coat check way more lucrative than the front desk or the person who hands out the audio tours.

Especially if the docents are unpaid volunteers, you wouldn't want to make coat check a place where someone could get money while everyone else doesn't.

Fred Giertz writes:

Question:

Why are tips always discussed in percentage terms? Is good service for a $200 meal worth four times the tip for a $50 meal?

Con Reeder writes:

On the issue of roadside diner tipping, i.e. tips even thought I will never return, I feel a certain need to keep up the reputation of my demoographic -- older white males. I get excellent service at almost all restaurants that have tipping, and I believe it is because my demographic cohort tips well.

There are at least two demographic cohorts who have sued for poor service at chains of restaurants, blaming it on discrimination. I believe this was not due to racism or sexism per se, but because those demographic cohorts don't tip well. Were large groups of single women excellent tippers, I think they would get great service.

Dr Golabki writes:

@Fred G.

It's depends...

First you've got to account for volume. The server at a $50 per table restaurant is probably turning a LOT more tables per hour than than the server at a $200 per table restaurant. I wouldn't be surprised if it was a 4-fold difference, in which case they servers are getting tipped out the same if they are getting the same percentage.

Also, I would say a server at a high end restaurant is expected to have more experience, and more knowledge than a mid-tier restaurant.

John Strong writes:

Elegant arguments about Principles and Agents are so compelling that as I listened I was inclined to reconsider my hatred of tips, then suddenly I wake up: these arguments make great stories, but no more.

All incentive arguments ignore the fact that incentives are largely uncoupled from actual service, for *many* reasons.

Ever since the restaurant Black Eye Pea publicized it, many restaurants (maybe most low end restaurants) have adopted the policy of using uncomfortable chairs and other incentives to ensure that people do not stay too long. Overly friendly waiters are one dimension of this. If you want to talk with your guests, forget it, because the "friendly" waiter will ensure that your meal is moving along, because he wants you to get the hell out of there.

Your guest says he feels like privacy some times and feels like friendly waiters on others and concedes that this preference is hard to convey. INFORMATION deficits generally undermine arguments from incentives. You can't tell the waiter you want to be left alone.

Social pressures (which contribute to the information deficits) prevent incentives from being operative. No one wants to be a scrooge or viewed to be one, so we are all under moral pressure to tip, even when we felt our service was nothing special.

Social pressures also prevent us from expressing our real wishes. I want to be left alone, but I can't pay someone to leave me alone. In Latin America I would gladly tip musicians not to gather around my table and make conversation impossible, but I can't. It's insulting. I can't pay management to lower the volume of the "wonderful" music or sports t.v. All these things are fixtures and they are governed by social protocols, not service incentives.

If if service varied based on an expectation of tips, it would not vary sufficiently to merit a finely tuned variation in tips. Fear of not getting tips may well help prevent an awful experience, but for service to get bad enough for me to decide not to tip, the waiter must be so bad that I would report him to management. Tips are limp tool for deincentivizing that kind of behavior.

If tips produced value with waiters, why wouldn't it be appropriate with other service people, the lady at the Starbucks, for instance? Why doesn't the absence of service lead to atrocious service at Starbucks?

Tipping as an institution is subject to capture by social shaming engineers who try to shame us for not tipping, when the "correct" amount to tip: at first 15%, now many say 20% or more if you are truly "socially conscious". This is just annoying game of keeping up with the moral Joneses, not a real social issue.

Last but not least, you completely omitted the one genuine reason why tips might be beneficial: they provide restaurant personel (and employers) with an opportunity to hide income from the IRS and possibly pass some of the savings on to the customer.

Dr Golabki writes:

Anthony and Russ discussed virtue signaling as a reason why people tip, but I think there's another aspect as well.

I think people, generally, are uncomfortable in situations where someone is serving them face-to-face. It creates a power gap (however small) that feels weird. It's a bit of a cost borne by the consumer. If you can salve that discomfort with a couple dollars, that's a good deal. This is a bit deeper than just obedience to a norm.

Notice, almost all tipping situations are face to face interactions (maid services is an exception, but having a person in the room where you sleep is sort of intimate even if you don't see that person). I sometimes order groceries to be delivered to my house. If it's a service where someone rings the door bell and I see the person, I normally tip and it's even an option to check on the bill. If it's a service that just drops groceries annomyously at my door I don't tip, it's not an option on the ordering system, and frankly it never occurred to me that I should tip until now.

I also think this is part of the reason people like things like anonymous delivery and ordering ahead at starbucks so you don't have to talk to anyone when you pick up your drink. You save yourself that little cost of the discomfort.

...or maybe I'm just projecting my own neurosis.

Floccina writes:

I was surprised that there was no mention of what I think might be the biggest problem with tipping servers. That is that the customers are mostly just trying to be generous rather than buying a service that they value highly, therefore servers can make a lot of money while delivering a service of lower value than they are paid. Some servers could be more productive in some other occupation are working as servers. That makes it harder to find good plumbers, carpenters etc even while there are people with college degrees waiting tables.

Margaret H. writes:

Floccina, I think you make a very valid point. I am a former restaurant owner. One thing that really surprised me when first got into the business was how many of my staff had given up what one would assume were more lucrative careers to wait tables. The truth, I soon found out, was that waiting tables was far more profitable than the careers they laid aside. I don't believe that the fact that waitstaff are raking in the money is in itself a bad thing, but unfortunately it is at the expense of the employers and kitchen staff.

For the employer, the fluctuating, high payroll taxes of the tipped staff makes working out a payroll balance a constant headache. Keeping a business with tipped employees below 40% payroll costs is a struggle. My restaurant was in a state that did not have a separate wage for tipped staff, so my staff were getting the state minimum wage plus tips. Nearly 75% of my payroll costs were spent on front of the house staff, leaving very little for the highly trained kitchen staff.

Many people here are talking about tipping creating incentives. Tipping as the primary source of income gives all the wrong incentives. In the restaurant industry, a server is not working for a restaurant, they are working for their customers, and some customers are a better source of income than others. This is not to say that all servers are motivated only by greed, but the incentive to give better service to one table over another is there, whether or not the server acts on it. Imagine if you were to switch up your employers several times per night. If your current employers include: a single mom eating out alone, and a wealthy lawyer and his wife celebrating their anniversary, to whom will you give the more attentive service? For which boss is there more incentive to please?

The percentage thing, as Fred Giertz points out, is another major problem with tipping. How much more work is required to open a $100 bottle of wine than a $20 bottle of wine? $16 dollars worth of work?

Margaret H. writes:

Floccina, I think you make a very valid point. I am a former restaurant owner. One thing that really surprised me when first got into the business was how many of my staff had given up what one would assume were more lucrative careers to wait tables. The truth, I soon found out, was that waiting tables was far more profitable than the careers they laid aside. I don't believe that the fact that waitstaff are raking in the money is in itself a bad thing, but unfortunately it is at the expense of the employers and kitchen staff.

For the employer, the fluctuating, high payroll taxes of the tipped staff makes working out a payroll balance a constant headache. Keeping a business with tipped employees below 40% payroll costs is a struggle. My restaurant was in a state that did not have a separate wage for tipped staff, so my staff were getting the state minimum wage plus tips. Nearly 75% of my payroll costs were spent on front of the house staff, leaving very little for the highly trained kitchen staff.

Many people here are talking about tipping creating incentives. Tipping as the primary source of income gives all the wrong incentives. In the restaurant industry, a server is not working for a restaurant, they are working for their customers, and some customers are a better source of income than others. This is not to say that all servers are motivated only by greed, but the incentive to give better service to one table over another is there, whether or not the server acts on it. Imagine if you were to switch up your employers several times per night. If your current employers include: a single mom eating out alone, and a wealthy lawyer and his wife celebrating their anniversary, to whom will you give the more attentive service? For which boss is there more incentive to please?

The percentage thing, as Fred Giertz points out, is another major problem with tipping. How much more work is required to open a $100 bottle of wine than a $20 bottle of wine? $16 dollars worth of work?

Chris writes:

I try to tip in cash whenever possible in hopes that the staff pockets as much as they can get away with. It feels good to give Uncle Sam an occasional poke in the eye.

David McGrogan writes:

In a lot of restaurants here in the UK tipping is made (sneakily) mandatory by adding a 10% "service charge" to the bill. There can be no possible justification for the persistence of this practice in either reason or morality - can there?

Robert Herreid writes:

Tipping is bribery. It's as corrupting in a restaurant as it would be at the DMV, IRS, in a hospital or police station. Just not as seriously damaging. Some people enjoy being a participant. Relatively inexpensive to hire a servant for a short time. Pays well to play the servant.

Greg Wilson writes:

I enjoyed the tipping podcast. Few people could hold my interest on such a mundane topic, but the economics perspective offered a lot of richness.

I was interested in one of the opening comments about tipping potentially becoming a thing of the past. This was inconsistent with my own recent experience at Panera Bread. After I placed my order and swiped my credit card, the credit card device prompted me to add a tip. I was surprised and felt awkward as the cashier was standing about 3' directly in front of me. I experienced this a second time at another Panera location, and now will have reservations about choosing to shop there under certain circumstances (grab a quick coffee or bagel, etc). The combination of a very brief interaction with the cashier, the lack of clarity of who is benefiting from my tip and the awkward feeling tells me this won't be successful.

Keep up the good work with the podcasts.

Trent writes:

Another very interesting discussion, not only about tipping, but also about the jobs/roles of the waiters/managers/owners/diners, too.

To the notion that some diners want to be left alone while others want to be fussed over, I wonder why it's left to the waiters to figure out instead of employing a "Casa Bonita flag system" (labeling it as such because I haven't seen it anywhere else). Each table has a little flag on it, and when you want the waiter to come over (e.g. refills, more food, dessert sopapillas, etc.), you simply raise the flag, and the waiter pops right over; otherwise, you're left alone.

It was noted that first-time waiters typically work at restaurants like Denny's....why wouldn't they use the Casa Bonita flag system? Over time, you'd learn when diners typically raise the flag, what type uses the flag most/least frequently, etc. You find it on airplanes in the form of the stewardess call button; why hasn't this idea caught on in the restaurant business?

Jon writes:

Quick question, what is the norm for take out?

Do you tip the person who hands you the food? If so, how much?

Margaret H. writes:

Jon, here is how a take-out transaction went in my restaurant: The chef and kitchen staff would prepare the meal, box the meal, and bring the boxed food to the counter; any waitress or hostess who happened to be standing near the register to ring up the transaction when the customer arrived to pick up their meal would receive the tip, if there was one. The kitchen, who did the entirety of the work, with the exception of ringing the transaction up in the register, got zilch. It is ILLEGAL for the kitchen to receive any portion of that take-out tip. As long as you realize who is benefiting from that tip, and you are okay with that, tip away. I would strongly advise not tipping 20% on a take-out, though.

Margaret H. writes:

Jon, here is how a take-out transaction went in my restaurant: The chef and kitchen staff would prepare the meal, box the meal, and bring the boxed food to the counter; any waitress or hostess who happened to be standing near the register to ring up the transaction when the customer arrived to pick up their meal would receive the tip, if there was one. The kitchen, who did the entirety of the work, with the exception of ringing the transaction up in the register, got zilch. It is ILLEGAL for the kitchen to receive any portion of that take-out tip. As long as you realize who is benefiting from that tip, and you are okay with that, tip away. I would strongly advise not tipping 20% on a take-out, though.

David Walker writes:

By almost every other podcast's standard this was great. But for my money, Econtalk is the world's best podcast - and by Econtalk's lofty standards this was sloppy, narrow and parochial, apart from a few minutes near the end where you ask a couple of more challenging questions. (Sorry to be harsh - and I repeat that as the greatest podcast in the history of the world, Econtalk has created its own standard.)

Why sloppy? Because the arguments made for tips apply to most of the economy. Yet we hardly ever use tipping outside restaurants and hotels, a point that was barely addressed. There are also all sorts of signalling problems and other inefficiencies in tipping that were glossed over; your other commenters above point out some of these inefficiencies.

Why narrow? Because hey, have either of you noticed Mike Lynn's work? You might at least have mentioned it.

Why parochial? Because many countries - especially in East Asia, but also in Europe and elsewhere, have social norms against tipping. Why did these grow up? If tipping in restaurants is so important, why is the US not globally famous for the quality of its restaurant experiences?

I could go on, but instead let's focus in on that first issue ...

And let's start with a special bonus question ... Why has the tipping norm evolved for relatively low-wage wait staff, but not for high-wage university professors? Please include in your answer an estimate for the relative importance of waiting quality in the overall dinner experience versus teaching quality in the overall university learning experience.

Note that professors give a series of lectures. So this seems an obvious arena for the application of the tipping principle. Indeed, it seems a much, much more likely arena than restaurant waiting. My own estimate is that wait quality is about 5% of the dining experience (the chefs, usually untipped, matter far more) while teaching quality is about 50% of the university learning experience. Also, waiters need to work as part of a team; professors generally do not. Also, while less waiting is often what I want, less teaching hardly ever is.

So we could reduce university professors' fees sharply and tell them to make it up on tips at the end of every lecture. (I am very open to arguments that university professors' quality is less important to most people than it is to me.)

Extra special bonus points for suggestions on tipping for doctors, lawyers, management consultants, investment bankers and CEOs, all of which require repeated service and specific interactions and are known to have substantial principle-agent problems - indeed, far bigger problems than restaurants. Boards could decide a tip for the CEO after their service has finished, for instance.

Indeed, Russ, you might suggest this to Ángel Cabrera. Let us know how you go.

I'm in Melbourne, Australia, famous for the quality of its restaurants. Little tipping (and most of that pooled, because good restaurant managers promote a team ethic). Great waiters. Consider this data. Tipping seems to be trying to solve a non-problem.

I have little time for Foucaultian thinking, but this is one area where I'm tempted to think that raw power dynamics play a big role in the evolution of a social norm and the intellectual argument behind it.

All in all, this was a shining example of how this podcast gets better when you and your interviewee disagree, and worse when the two of you agree. Russ, you get 5% of the amount I paid for this podcast. I hope this incentivises you to do better next time.

Luke Juarez writes:

First, I agree with R. Roberts that we need to decouple "tips" from "living wages," the latter of which is political and ill-defined.

Second, A. Gill's paper states the following reasons restaurant owners have abandoned the gratuity system: customer preference, division of gratuity among restaurant workers, employee happiness, and sexism and racism concerns. Are any of these trumped by principal-agent, gains-from-trade, and cultural trust benefits?

Speaking of principal-agent problems, I am not convinced it exists in the service industry despite the paper's claim "that [it] is particularly bedeviling." In reality, the service industry is likely the least affected by the principal-agent problem because the organizational hierarchy is flatter than large corporations; a restaurant's owner and/or manager are likely daily, perhaps hourly checking in with their employees; whereas an employee in a larger corp. might only weekly or monthly connect with his/her boss/manager. Yet somehow the larg orgs. manage to succeed using other incentives to "tightly align the interests of the principal and agent." (A Gills paper)

Third, A. Gill's clever arguments for the efficiency of tipping (e.g. "Surely markets would work to eliminate this norm if it was not efficient in an industry as competitive as restaurants") could be used for a wide variety of other non-efficient institutions. Sometimes bad ideas are just hard to kill (e.g. public schools).

Last, I believe I am not wrong in saying that, here in Portland OR, some people tip in some strange, misplaced solidarity with non-business owners/non-rich folk. This is only slightly a different motivation from charity, but it wasn't really discussed.

Earl Rodd writes:

I found this interview interesting as an analysis of how tipping continues to be practiced in the US in spite of its difficulties and sometimes absurdities. However, I don't accept the defense of tipping on economic arguments. By and large, tipping is not done in Australia. Having lived in Australia for 9 years and spending a fair amount of time there each year now, I saw no evidence of the principal-agent problem or the other supposed economic advantages of tipping. It is true that the situation is complicated by the complex regulated way in which wages are determined in many industries. But to me, the most interesting cultural difference is the Australian reason for not using tipping. Growing out of its penal colony roots, Australia prides itself as egalitarian. Thus restaurant workers, tax drivers etc. are workers paid wages, not servants hoping for a handout from social superiors.

On an unrelated issue, I think Gill is wrong about filling tables by having effectively lower prices for non-tippers. This may happen, but it is a terrible strategy to fill tables, since non-tippers are just as likely (maybe more likely since they don't stand out) to come during busy times as times with empty tables.

John Barker writes:

I did not hear anything on minimum wage increases and the increased cost of eating out. Some states had two separate wages, one for wait staff which was like $1.00/hr and then the normal minimum wage. Doing away with those exceptions and/or increasing minimum wage would increase cost which will be offset by higher prices and lower profits. If wait staff are self interested they might vote in favor of candidates promising higher wages and then they get 15% on even higher food bills, win win. Maybe we should stop tipping or tip lower for this issue?
If you do tip, you might consider cash only or better yet silver, to keep out of tax loop, unless you think taxes are part of a organized society.
Also I heard (not confirmed) that waiters in high end restaurants in New Orleans actually pay for the position. That would create a huge incentive to be a good waiter, increase your food bills and build clientele, etc, etc. Principal - Agent problem solved?

Robert Herreid writes:

Floccina,
I would bet that often servers are receiving tips from customers who make less money than them. Thinking they are being generous. Sometimes the server gave up the career path the customer followed.

Ravi writes:

Instead of Uber adopting the tipping system of restaurants, what about the other way round?

Restaurants could keep a flat service charge which could later be divided among the wait staff based on the ratings that they receive from the customers.

Phil writes:

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James Pass writes:

David Walker made most of the points I was going to make, though instead of "sloppy" I would have said this episode surprisingly missed many obvious points.

It's rather obvious: If the main argument of the guest is that tipping creates incentives to provide good service, then levels of service and customer satisfaction would have to be compared between tipping and non-tipping restaurants. This comparison would be rather easy to do. If the guest's premise is correct, we should expect to see superior service and satisfaction at tipping restaurants.

Judging from my personal experience, service levels and satisfaction are equal if not better at non-tipping restaurants. In fact, I've never heard anyone tell me that service at non-tipping restaurants is worse than at tipping restaurants.

I don't have strong feelings about tipping, and I generally tip at 20 percent for decent service, mostly because I know waiters depend on tips to augment their low base pay.

There have been a handful of times that service was bad enough that I didn't want to leave any tip, but in those cases I asked to speak to the manager. If all I do is not leave a tip, I'm merely giving feedback to the person who gave me the bad service. That person already knows he gave me bad service, so I'm not telling him anything he doesn't know. For whatever reason, he just didn't care about doing a decent job on that particular day. The person who needs to know about the bad service is the manager.

I talk to the manager not because I want to get the waiter "in trouble." I talk to the manager because he needs information about his restaurant in order to make it a place I enjoy coming to.

By the way, if I get really bad service from a waiter, it wouldn't matter if I'm at a tipping or non-tipping restaurant. Either way I'll talk to the manager. But now that I think of it, I've never had really bad service at a non-tipping restaurant. I've only experienced really bad service at tipping restaurants. I have some ideas about why this might be so, but going into that would make this comment too lengthy.

The guest also talked about waiters not wanting to provide service to people or groups that might not tip well. To me, this is a sign of bad management. Each restaurant should have some kind of fair system that assigns waiters to customers. Waiters should not be allowed to choose their customers. If waiters are allowed to choose, the pushiest waiters will get more than their fair share of good customers.

James Pass writes:

I'm responding to the comment above posted by Luke Juarez.

Luke states that living wages are "political and ill-defined." But how hard would it be to come up with a workable, basic definition? For example, could we say that a living wage is an income sufficient to pay for basic necessities (e.g. shelter, food, medical care, transportation, communication, etc.) without any government assistance?

Once we agree on a definition, we could then begin discussing what society should do about people who want to earn a living wage but can't, which of course is a very big, complex topic (a topic I wish Russ would address more often, in fact).

Luke states that public schools are a "bad idea." I wonder if he thinks universal health care is also a bad idea. Both of these are off the topic of this episode, but since Luke mentioned it I'll ask if anyone can recommend a good book that discusses things like education and health care from a libertarian perspective. By "good book," I mean a book that goes into sufficient detail and is supported by evidence.

James Pass writes:

I'm responding to the comment from Robert Herreid. He says that his son and daughter had to close their restaurant in Washington state because of the increase in the minimum wage.

In Washington state, the minimum wage went from $9.47 an hour to $11. (It's slated to rise to $13.50 by 2020). But Robert doesn't make it clear why the restaurant suddenly failed. He seems to blame increasing taxes more than wage hikes. But the increasing taxes weren't coming from restaurant revenues; they were coming from tips, which are employee revenues. Moreover, since the minimum wage increase was applied statewide, this particular restaurant shouldn't have been at any competitive disadvantage relative to every other restaurant. In other words, the most likely result would be a slight increase in cost to restaurant customers across the board.

Of course, classic economics tells us that when the price goes up, business generally goes down. So it's possible that this restaurant experienced a slight decrease in business due to higher prices. But Robert didn't go into detail.

I'm very interested in what Robert said about waiters making $50 an hour while the chefs make $20. If the earnings differential is as dramatic as that, I'm amazed that anyone would want to be a chef. A chef works harder, and requires more skill, knowledge and experience, than a waiter.

James Pass writes:

One thing not mentioned in the interview or comments is the big change in tipping that started happening in the 1980's, I think.

Before, it was customary to tip on food, not alcoholic beverages. So if you ordered wine or cocktails with your meal, you would look at the food portion of your bill and generally tip 15 percent on that. Somewhere along the way it became customary to tip on food and alcohol, and for the life of me I can't recall when or why I started going along with the change. I suppose I started to notice other people doing it, so I felt social pressure to go along so I wouldn't be regarded as cheap. (Russ, invoking Adam Smith, would say I want to be regarded as "lovely.")

In some cases, the alcohol costs as much or more than the food, so tipping on alcohol often doubled the tip. Once a year or so I'll look at my wife and ask her, with a forlorn look on my face, how this big change happened and why there didn't even seem to be a national discussion about it. And to all you millennials out there, yes, even in the dark days before the internet and social media, there were "national discussions" about things, except we had them - gasp! - face to face.

So I'll ask all the (older) fans of EconTalk if they know what I'm talking about. Or maybe you'll tell me that I'm crazy and it was always customary to tip on food and alcohol. Maybe I grew up in a community that wasn't mainstream and we were doing it wrong. But I grew up in a middle class city near San Francisco, in the 1950's and 60's. I'd be surprised if we weren't mainstream, but who knows?

Besides that, I've noticed that whenever I ask a waiter for a wine recommendation, they unfailingly recommend the most expensive wines.

Robert Herreid writes:

James,

My point wasn't that the raise in the minimum wage was the only reason the restaurant failed. But the income differential between the front and back of the house was as I stated. I just checked with my daughter. Her highest paid chef was getting $18/ hour. Her highest paid waitress made as much as $60/hour...most made at least $30. This was at a mid tier restaurant. The differential would be even higher at a more expensive restaurant where kitchen staff wouldn't get much higher pay, but waiters could make as much as $2,000 on a busy weekend night. Ask around. Waitstaff often like to brag about how much they make in tips and kitchen staff like to complain about their low pay.

"If your employee makes more than $20 in tips per month, you are responsible to withhold income, social security and Medicare taxes on reported tips. You are also required to pay the employer's portion of FICA and FUTA taxes on tips." Dept of Labor. When cost go up, menu prices need to go up, tips go up and employer's payroll taxes go up. It's a vicious cycle.

Their struggle and failure is not an isolated case. All restaurants in Washington (and most places in the country) have to deal with these things. Some have experimented with counter service or service charges. Check out Tom Douglas' business model in Seattle or Danny Meyer in NYC. Both are concerned with the differential in pay for front and back of the house.

Robert Herreid writes:

James,

My point wasn't that the raise in the minimum wage was the only reason the restaurant failed. But the income differential between the front and back of the house was as I stated. I just checked with my daughter. Her highest paid chef was getting $18/ hour. Her highest paid waitress made as much as $60/hour...most made at least $30. This was at a mid tier restaurant. The differential would be even higher at a more expensive restaurant where kitchen staff wouldn't get much higher pay, but waiters could make as much as $2,000 on a busy weekend night. Ask around. Waitstaff often like to brag about how much they make in tips and kitchen staff like to complain about their low pay.

"If your employee makes more than $20 in tips per month, you are responsible to withhold income, social security and Medicare taxes on reported tips. You are also required to pay the employer's portion of FICA and FUTA taxes on tips." Dept of Labor. When cost go up, menu prices need to go up, tips go up and employer's payroll taxes go up. It's a vicious cycle.

Their struggle and failure is not an isolated case. All restaurants in Washington (and most places in the country) have to deal with these things. Some have experimented with counter service or service charges. Check out Tom Douglas' business model in Seattle or Danny Meyer in NYC. Both are concerned with the differential in pay for front and back of the house.

James Pass writes:

Response to Robert Herreid:

You bring up an aspect of the restaurant business that would make a fascinating and important topic for Econtalk. It sounds like an elephant-in-the-room kind of topic.

Robert Herreid writes:

James,

I agree. It would be a great show to have Russ Roberts talk with Tom Douglas, Danny Meyer or a selection of chefs, owners and waitstaff on this topic.

Luke J writes:

Hey James P,

Fair wage is just too general. A 16 year old living at home and a 43 year old single parent might both be waiting tables at the same restaurant, but would have wildly different needs re: transportation, medical care, food, as you mentioned. We'd have to set some very narrow parameters, and I'd expect a huge political fight over the details.

And I should have been more careful saying public education is a bad idea. Mostly, I wish the default assumption is enrollment in for-profit or non-profit private schools, with a public-provided option that is need based.

I believe when I had initially started that paragraph, I had pointed out that Russ Roberts is very low on public schools (which have some merit), but high on tipping ("I think tipping is a really beautiful thing") which is, imo, without merit.

James Pass writes:

Luke,

Nice to hear from you. It's off the topic of tipping, so I'll respond very briefly to your point about a "fair wage."

I suggested that a living wage (not the same thing as a fair wage) might be defined as income sufficient to pay for basic necessities without government assistance. The key concept was "independence," or, put another way, a lack of dependence on anyone else. That would include a lack of dependence on parental assistance. A typical 16-year-old living at home isn't trying to earn a living wage.

It's interesting that we tend to regard the tipping professions (such as being a waiter) as low pay professions, but one thing I've learned from this episode, and the comments posted by fellow listeners, is that being a waiter can be a good middle class job. People spend lots of money to learn how to be chefs and cooks, and it turns out many of them earn less money than tipped waiters who don't need any formal training.

Jerm writes:

I work at a community college with a well-attended culinary program. People come in to train towards being chefs, and we have a ton of restaurants for them to work at in the neighborhood.

And each of them enter the program knowing that they are paying for skills that will result in a low paid job, while there's no program for wait service. And that could pay a lot more.

It's not as simple as saying one job is hard and one job is easy. Some people just don't want to interact with the customers, regardless of the wage. And believe it or not, there are some people who work in both the front and back ends of a restaurant. And some of them prefer the kitchen.

If the topic was really "tipping", it seems like it would be beneficial to focus on bars. Nobody is tipping their server there while fretting about the fact that none of that tip goes to Anheuser-Busch.

James Pass writes:

Hi Jerm.

Speaking of bars and bartenders, when about half of my tip for a typical meal is for wine and drinks, I'm wondering how much of that tip goes to the bartender. Someone might point out that the waiter, not the bartender, is doing the work of upselling the alcohol, but typically customers know exactly what drinks they want to order without any assistance from waiters.

I don't understand your analogy to Anheuser-Busch. The chefs and cooks at a restaurant are providing direct and personal service to the customers, and one's enjoyment of a meal depends very much on the care taken to prepare each and every order. The same could be said for bartenders preparing mixed drinks. Anheuser-Busch manufactures a product - beer - and sells millions of bottles a year. They don't provide a direct and personal service to individual customers, which is why people don't tip corporations.

That being said, I agree there's plenty of inconsistency. For example, my dentist provides direct and personal services to his patients, but who tips dentists? On the other hand, in a restaurant, the cooks, waiters and bartenders act as a team, and all of them are critical for customer satisfaction. So if we're going to tip at restaurants, why shouldn't the entire team share it? If someone wants to claim that waiters are incentivized by tips, wouldn't cooks also be incentivized by tips?

After all, when it comes down to it, isn't the food more important than the service? There are plenty of restaurants that thrive in spite of chronic complaints about bad service, but it's pretty rare to see a restaurant survive - let alone thrive - if they serve bad food.

Jerm writes:

Hey James,

My point about making a clear distinction between bars and restaurants is that it's completely obvious that in a (non-craft-cocktail-experience) bar, you are only tipping for the service you are getting. There's no mistaking that the tip might somehow migrate to the workers in the back. There are no workers in the back. It's just a bar. No consideration is given to the people who made the beer.

Because reading through this discussion about tipping in restaurants is a reminder that there are A TON of complicating factors surrounding restaurant tipping, some of which gets into race, gender, and class issues. And so many of these complicating factors hinge on judgements of other people's motives. But in a bar? Super simple. You are paying for a glass of something, and you are tipping for the service of someone giving you that glass. That's all.

Kind of weird that the discussion about giving money to the homeless and the discussion about tipping are leading to such different conversations. Seems like the libertarian view would be similar and consistent in both cases, but I guess it just isn't.

Todd writes:

I'd like to apply a reverse logic argument to tipping.

Consider tipping as a mechanism for owners to eliminate 'cheap' clients. This allows owners to have higher paid / better quality employees without increasing product prices. And a freer spending client base to support their business.

'Cheap' (zero/low tip) customers will receive less attention to detail from staff which can degrade product quality (food / drinks) and likely has a worse interactive experience with the staff. All designed to get rid of the customer.... a silent 'no soup, 1 year' signal.

Long term the restaurant gets a better wait staff without increased business costs and higher spend customers. This feedback is particularly effective with regular customers who the owner wants to bear a significant portion of the ongoing business costs.

Of course there are flaws with this thought model, but it is an interesting twist that could have been involved in the original 'tipping culture' development. I imagine it started at higher end establishments and trickled down to the masses (the wealthy brought tipping from Europe). High end businesses may have found this as an effective way to screen out the riff raff.

MM writes:

Discussion completely missed the mark. No mention of paper by Torfason, et al.? No discussion of the fine line between tipping and bribery? Tipping as wealthy buying influence?

Torfason, Magnus Thor, Francis J. Flynn, and Daniella Kupor. "Here's a Tip: Prosocial Gratuities Are Linked to Corruption." Social Psychological & Personality Science (forthcoming).
Full Text & Related Files: Here's-a-

http://nrs.harvard.edu/urn-3:HUL.InstRepos:9491448

I think someone else mentioned that tips are not used for professors, physicians, politicians, etc, as it could be construed as, or be, vying for favor and a sign of corruption. It may have undue influence on the service provided, where in reality, the service should always be at the highest level. Why not for waitstaff, taxis, etc?

Also Uber introduced tipping to retain drivers because drivers were preferring Lyft who allowed drivers to recieve tips.

Bruce Levine writes:

I would be interested in any comments by Anthony, Russ or any other other commenter, to an agency problem not discussed in the podcast (but to which Russ has alluded the past). This concerns the phenomenon of wait staff providing extra ("free") appetizers, etc. to patrons in circumstances counter to the interests of the owner, but in the interest of the server in encouraging a larger tip.

Jerm writes:

This is for Bruce.

In most of these situations, creating food or drink orders will generate a paper trail. So the server wouldn't really be able to get anything for free, other than the types of things they have to create themselves (like soft drinks and coffee).

The person who CAN act against the interest of the owner is the bartender (because they could just pour a drink without making a ticket). Which means that if a customer wants that kind of perk, they would need to sit at the bar (instead of being served by waitstaff at a table).

But bar audits are pretty thorough these days. Some places even weigh the bottles and kegs monthly, so management knows how much alcohol is "evaporating". I've been told that figuring out which bartender is too generous is rather easy.

It's not as accurate as figuring out which bank teller is stealing from their drawer, but it's good enough. I've had several conversations this week about this topic, and it seems like the principal-agent problem created by tipping isn't really much of a problem. Generally speaking, interests of the owner and the server line up pretty well. Anecdotal stuff exists at the edges, but I don't think it really rises to the level of a market inefficiency.

Bruce Levine writes:

Hi Jerm,

Thanks for the responsive insights.

Bruce

Charles Mann writes:

One thing that I didn't hear discussed was the natural experiment that different countries and cultures already provide.

For those countries that have a tipping custom, do customers have a higher rate of satisfaction?

If this isn't the case, that would appear to argue that tipping isn't necessary for good customer service.

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