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Why does America have tipping?
Back in the days of Fifty Questions, a loyal MR reader asked:
I am interested in the economics of tipping. This seems appropriate, since you seem to eat out a lot. Why in the United States is the pay of waitstaff structured as it is as compared to elsewhere, where tipping is less expected?
The best way to understand tipping is to go to a restaurant you will never patronize again. Once your meal is over, when she is not looking, leave your tip not on your table but rather on another table she served. That way she still gets her money and you have in no way ripped her off.
That is psychologically tough to do. You fear the waitress will think you are a lout and a deadbeat. Of course in no-tipping countries, or for that matter non-tipping sectors, this dilemma does not arise.
The real question is why America is structured so that waiters and waitresses can sell feel-good services ("you are a generous tipper and a fine man") to strangers, in return for money. In other words, how did waiters end up as fundraisers, noting that the final Marshallian incidence may lower their wages by the amount they receive in tips? Most cross-cultural explanations of tipping start with the agency problem between diners and servers ("can you bring my drink now?"), but I believe that is the wrong approach. I view tipping as correlated with effective fundraising in other areas, and Americans as being especially willing to set this additional fundraising arena in motion.
Posted by Tyler Cowen on May 16, 2007 at 04:27 AM in Food and Drink | Permalink
Comments
Tipping is just a tax dodge. Empoyers paying staff badly to encourage tipping is a strategy to pay their employees in the most tax efficient way. In the US a large part of a waitresses pay is from (tax-free) tips. In Europe with minimum wage requirements waitresses get paid a salary (or piece rate), and tipping is much lower.
Posted by: Daniel at May 16, 2007 5:11:08 AM
I would suspect that tipping practices have something to do with social equality, and particularly employment practices and the employer/employee power relationship. Wouldn't the employer want tipping? It seems to me that it permits him to price discriminate. On the other side, here's what I would have thought as an employee:
"I'm an employee, not a servant. You buy my services, I don't just give them to you and hope for compensation. Just because I serve you food doesn't mean you're better than me."
I don't like to tip, either. I feel it poisons my relationship to the waiter/restaurant, making it less of an equal exchange.
Posted by: Harald Korneliussen at May 16, 2007 5:35:23 AM
Are tips actually tax exempt in the United States?
Posted by: Guan Yang at May 16, 2007 6:07:59 AM
Tipping is a good way to foster good service
delivery since in order to get the tip the
waiter has to perform good. This reduces
monitoring costs to the bar owner/manager
translating supervision to custerms.
This systems requiere customer empowerment,
a culture of saying what is good or bad in
a restaurant. In oder words, a culture of
getting what I paid for. In my country, Spain,
this is not always the case, also becouse
the oportunistic behaviour of customers is too
big.
Posted by: joan oriol at May 16, 2007 6:23:33 AM
Here is a barkeep in Cincinnati, talking about tips - less theoretical than here!
http://tavernwench.blogspot.com/2006_12_01_archive.html
Posted by: dave.s. at May 16, 2007 6:56:32 AM
Guan,
Tips are subject to income tax, but they are vastly underreported.
Posted by: The Other Brock at May 16, 2007 7:00:04 AM
I think tipping is some kind of corruption .
Posted by: Hakan at May 16, 2007 7:02:40 AM
In the UK, tips goes straight to restaurant owner.
There was a case from a London Covent garden restaurant where waiter were denied the tip and all went straight to restaurant owner.
Posted by: anpny at May 16, 2007 7:22:30 AM
To me the economics of tipping are pretty straightforward: it's the only way to ensure good service. Service in France is famously horrible because service is included and tipping is not part of the culture, while in places like Israel and the US service is always good. In the US you sometimes get mediocre service, but never MEAN service the way you often get in Paris (and I'm French, so it's not an anti-tourist thing, it's just the way things are).
Posted by: PEG at May 16, 2007 7:33:11 AM
Tips are Lindahl prices for local public goods...not the individual attentions of a server (that is a private good), but the overall quality of the experience or the time spent waiting (for a table, for a server). Because these payments are self-assessed and often paid in cash,they seem to be payments to the server. But the compensating wage differential
induced by tips, means they actually go to the proprietor, the server's
employer, the supplier of the local public good.
Posted by: David Flath at May 16, 2007 7:52:29 AM
Here is a literature review
http://ideas.repec.org/p/wpa/wuwpot/0309006.html
by Ofer Azar
http://www.oferazar.com/
who has a bunch of papers on the economics of tipping
Posted by: hbi at May 16, 2007 7:57:02 AM
I've seen a few personal ads from women saying that they kind of guy they're looking for is a good-tipper. Thus, I suggest that tipping serves partially as a signaling mechanism, indicating that a spousal candidate would be generous with his financial resources.
It would be interesting to see if women's preferences for their companion's tipping change over time. Before marriage, generous tipping is a signal that the man will be generous with the spouse. After marriage, it's (a) money that could be "better" spent on the wife; (b) potentially flirtatious behavior between the man and a younger woman.
Posted by: TJIC at May 16, 2007 8:03:23 AM
I'm not convinced that Americans are friendlier because of the tip.
All services (even those that don't provide an opportunity for tipping) are provided by Americans with friendlier dispositions. Call up HSBC with something they've done wrong & then call Bank of America or whatever with teh same problem, guarantee you that BofA will at least pretend to care.
Posted by: priscieve at May 16, 2007 8:17:11 AM
Maybe you need a better example than Bank of America? "Friendly, effective service" is not generally what I associate with them.
Posted by: perianwyr at May 16, 2007 8:29:42 AM
A meal at a restaurant is a product. The producer (the owner) utilizes various inputs including labour in the form of waiters and cooks to deliver the finished product. Now, prosumably, consumers will only pay for the meal exactly what they think it's worth. But with the tipping system, they split the total payment between the bill and the tip.
If the VAT on a meal is, say, 16%, the tipping requirement is 10% of the value of the meal before tax, and the price menu of the meal (including VAT) is $100, for instance, then the diner ends up paying $108.62. The waiter earns minimum wage, which is say 5$ an hour. Assuming he/she serves some 3 meals in an hour, he/she pockets around $31 bucks every hour (but this can vary a lot from hour to hour, and night to night). The owner pockets $253.62, and pays the rest of the $300, or $41.38, in taxes, and $5 in wages.
Now, if we were to get rid of the tipping system, the owner of the restaurant could charge $108.62 for the meal, including VAT. He would take in $326, pay $45 in taxes, and pocket $281 before paying wages. Now, he has to pay salaries considerably higher because waiters are not getting tips. If he compensates the waiter/tress by paying him/her a higher salary, (slightly below what he/she would make on tips plus hourly $5 wage but not so far below that he/she wouldn't be willing to work; say $25 an hour) he still walks off with $255.9, or $2.3 more dollars every 3-meal hour.
I would think it would be sensible for a risk-averse waiter/tress to take the cut in pay in favor of a steadier income. Then the owner would be assuming the risk; if business is good enough that, on average, he'll get 3 diners per hour per waiter every day, it makes sense to drop the tipping system. Otherwise, and I think most restaurants are in this position, it's better to have tips.
I'm sure I made a terrible mistake in calculation somewhere, so please correct me, and I'm also ignoring the fact that dropping the tipping system could undermine the quality of service, and thus hurt the booking rates of the restaurants, thus forcing the owner to re-institute it.
Posted by: Yotuel at May 16, 2007 8:30:18 AM
Any explanation that says tipping has arisen because it offers better service is wrong for two reasons. 1) It doesn't (the French are just being French, service in Australia or the UK is just as good as here, without all the transaction costs of tipping) 2) It doesn't explain the difference across countries. The history of tipping is interesting if not illuminating. Tipping was not important in the US until after the turn of the century (or maybe after the civil war). Then it became important as travelers from the US to Europe returned and began tipping because that's what they did over on the continent at that point. Then things reversed. Unfortunately I can't remember where I read this, so I can't reference it, but it raises more questions than answers.
Posted by: a student at May 16, 2007 8:49:47 AM
You pay the restaurant for the food and the waiter/waitress for the service. At leas that is how I have always approached it.
Posted by: Jacob at May 16, 2007 9:06:10 AM
Tipping becomes more complex the more you think about it. I would venture that tipping attracts a more entrepreneurial type of employee, as is also the case with sales jobs paid by commission. If the prospective employee thinks he can do the job very well, then he would be attracted to a position in which compensation is closely correlated with performance. If the prospective employee lacks confidence in how well he will do the job, he would prefer all of his compenation to be in the form of a pre-arranged salary with only periodic performance reviews and pay adjustments.
The entrepreneurial spirit encouraged by tipping would be good in that it leads waiters to take "ownership" of their jobs and be more interested in keeping the customers happy. Also, in places where tips are pooled, tipping should cause waiters to monitor each other to make sure that no one is dragging down the pool through poor performance. Likewise, pooling should discourage competition among waiters that would hurt business (e.g., waiter A stealing waiter B's dishes at the pass-through, so that waiter A's customers benefit at the expense of waiter B's).
On the other hand, the entrepreneurial spirit could also have negative consequences. The interests of waiters and employers are not perfectly aligned, with the result that the waiter could "cheat" the business in order to extract a bigger tip (e.g., persuading the cooks to provide "free" appetizers for repeat customers). Also, I understand that waiters are a notoriously rebellious and independent bunch.
How this all may be related to U.S. culture, I don't know.
Posted by: jp at May 16, 2007 9:25:52 AM
The tax explanation is interesting, but it would predict a higher expected tipping rate in countries with higher payroll taxes than the U.S., which is not observed.
Tipping as fee-for-service is interesting, but why then is tipping calculated as a fraction of the total bill, when presumably the quality of service does not scale linearly with the price of the food. And personally, I have never experienced service so bad that I felt able to not tip.
Tipping as a singal fits with my experience, if the primary audience for the signal is one's self. We tip in order to feel generous in a culture where many kinds of generosity are socially awkward.
Posted by: Cyrus at May 16, 2007 9:27:06 AM
When I eat at a diner, I love leaving hostages at tables because I have to go to the counter in order to get change for a tip. If that person isn't left at the table, the waitress will think I'm taking off without paying her. She will!
Posted by: Rue Des Quatre Vents at May 16, 2007 9:34:53 AM
jp said: "The interests of waiters and employers are not perfectly aligned, with the result that the waiter could "cheat" the business in order to extract a bigger tip (e.g., persuading the cooks to provide "free" appetizers for repeat customers)."
Having worked as a cook in a relatively pricey (for the area) restaurant with lots of repeat business, I can attest that this happens /all/ the time.
Posted by: Carson at May 16, 2007 10:06:23 AM
I always assumed tipping was simply a way to shift the compensation of waitstaff to the customers from the owners. In Florida, a waiter is paid $2.13/hour. The tips received make up the difference to get an average wage above minimum. Maybe this is not how tipping started, but I believe it contributes to it not going away.
Posted by: J at May 16, 2007 10:09:35 AM
Tyler, it's not just that the waiter/waitress will think you're a deadbeat. It's that you could *ruin his or her day*.
Do you think the waitress's happiness at the end of the day is a rational, linear function of her total tips? No; if you do your experiment, she'll find one unusually big tip (happy) and one missing deadbeat tip (unhappy). Thanks to negativity bias, that's an overall bad day. That (I say, trying to imagine myself as unselfish) is a better reason than shame to not dodge tips.
Posted by: Ben M at May 16, 2007 10:43:54 AM
From my current class on the Economics of Information, a few thoughts.
Tipping shifts some risk from the employer to the employee, leading to a more optimal total utility outcome because the both parties benefit from distribution of the risk according to the relative risk tolerances of the two parties. The restaurant certainly takes on the majority of the risk, but transferring some is probably more optimal.
Moral hazard also plays a role; comment cards can only go so far in ensuring an agent's good behavior. Tipping is a straightforward way to align the agent's incentives more closely with the restaurant.
I'd say the best result for the servers is that tipping is likely to increase their average intake--because the job is riskier, they are receiving a premium for that risk, a positive difference between the wage they "feel" like they are receiving and the actual average wage they get. Waitstaff that are more tolerant of risk will make more than those who are less tolerant.
Posted by: Chris Milroy at May 16, 2007 10:57:36 AM
Australia and New Zealand are English-speaking countries in which tipping usually does not occur. In my experience, the service in those countries is just fine. I much prefer their system to the "everyone has his hand out" one in the US.
Posted by: Ned at May 16, 2007 11:04:08 AM
