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.
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.'
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.
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.
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.
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.
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.
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.
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.
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: 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.
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.