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The economics of tipping
Wayne, a loyal MR reader, writes to me:
I am going to start tipping based on an estimate of the number of checks a waiter presents per hour divided into my estimate of what his services are worth per hour without regard to the amount of the bill.
Of course the way it works now we tip as a percentage of the bill, paying a kind of flat tax unrelated to labor effort. Was it really that hard to cover over the $100 bottle of wine?
Let's assume everyone behaves that way. In essence we would tipping on the basis of how many plates are carried and not how much value is on the plate. The end result would be better service in poor restaurants and worse service in more expensive restaurants. People who patronize lower-price restaurants, or order lower-price entrees, would pay more in percentage terms in the form of tips. To some extent the price of food in these restaurants would fall to compensate and waiter wages in the restaurants would fall too. Waiters in the fancy restaurants would become more like fixed-price servants and in fact this already has happened in some fancy resorts.
If I wanted to defend Wayne's view, I would invoke the following claim: maybe we tip the fancy waiters to feel fancy ourselves but could there be a greater potency of tipping at lower price ranges, where waiter quality is harder to monitor? Note also that more people eat in the lower price ranges, so shifting your tipping convention in that direction might bring a greater positive externality for society as a whole.
Posted by Tyler Cowen on August 14, 2008 at 06:58 AM in Economics | Permalink
Comments
I've found that if you plan on eating somewhere more than once, tipping well makes them remember you, and gets you better service on return visits. I don't understand people who don't tip well, unless the service is very sub-par.
Posted by: almitchell at Aug 14, 2008 8:17:54 AM
Self-interested tipping has served me well over the years. Unapologetic low tips, regardless of service quality, are the norm paid to the same sex as myself. However, exorbitant tips are bestowed upon servers of the opposite sex in an attempt to signal access to resources and willingness to dedicate those resources to the opposite sex. The obvious exception to this rule is if I am dining with a member of the opposite sex. In that case no expense is spared. Social signaling and status seeking are all I am concerned with, and I have personally benefited from this strategy.
Posted by: Steven at Aug 14, 2008 8:36:55 AM
Essentially then, performance-related pay as opposed to prestige-related pay. If you can overcome the obstacle that tipping is more-often-than-not regarded as a top-up to what the waiter should've been paid in the first place, then performance-related pay is a fairer and more appropriate solution. There are issues of not everyone behaving how you would want them to behave (5 star service, $0 tip) but that is inherent in any voluntary system.
One problem is where tips are shared between other waiting staff, and/or back of house staff. The group is then rewarded for the actions of an individual, again creating a tension. Arguably the price/prestige-related mechanism is fairer in this case, since you can assume that more expensive food requires more skilled chefs.
A more reliable approach is to ensure that all restaurant staff are paid an appropriate wage for their responsibilities, such that customers are under no obligation to feel they have to top it up. Performance management would then redress any situation where an employee is slacking. If a customer was then so pleased with the experience that they - in the knowledge that everyone's being paid a decent rate - still wanted to tip, then everyone's happy. The dichotomy is how to convince the customer that this is actually happening fairly, and how to convince the restaurant to raise prices proportionally in order to cover the decrease in tips. One way of breaking out would be to have an organisation restaurants can voluntarily apply to which 'certifies' (providing logos, statements etc. which can be used on publicity materials/menus) that a fair performance-related employment scheme is in operation and explains that the cost of the food/drink (without tip) is both financially and morally sufficient.
Posted by: Alistair at Aug 14, 2008 8:52:44 AM
So essentially, the "rule" is to tip at the rate of five bucks per hour (or at least minimum wage) for the amount of time we are being served. Assuming the waiter is doing at least x tables, he willearn at least x times minimum wage before any fixed salary. Seems reasonable?
Posted by: RNB at Aug 14, 2008 9:11:24 AM
If Wayne also decides to factor in the number of people who are actually involved in his service at different qualities of restaurant, he might find that tipping by percentage is a pretty good estimate, and much easier decision to make. High end restaurants have much more staff per customer, and turn their tables much more slowly. They also offer much better service than the 15 year old gum chewer who says 'Hi, my name is Kaytlynn, and I'll be your server today.'
Posted by: Jacquilynne at Aug 14, 2008 9:12:18 AM
Won't it also depend on the individuals demand for service? Patrons to a fancy restaurant will want higher quality service so their demand curves will be higher, and waiters in fancy restaurants tend to be more skilled servers so supply curve will be higher, and the equilibrium per plate tip will be higher than low quality restaurants. The service would be more efficient in each level of restaurant, with MC closer to MR, but the relative prices between levels needn't change.
Posted by: O at Aug 14, 2008 9:25:20 AM
There's also the usual argument that tipping well is a subsidy to the arts, and encourages starving artists to persevere (and make ends meet waiting tables) rather than give up and get a regular, better-paying job...
Posted by: Jack at Aug 14, 2008 9:29:23 AM
Wayne's theory sounds to me like some kind of offshoot of the Labor Theory of Value. I don't care how many tables my server handles. I tip based on how often I frequent a restaurant. If I am a regular visitor and want to be treated like a movie star, I tip like a movie star.--and eventually I find A. the waiters most attuned to tips end up waiting on my table and B. I get treated like a move star.
If I am travelling and at a restaurant that I am unlikely to ever be in again, I will tip based on service.
BTW: In the glory days of the Chicago Bulls, every waiter in Chicago new the tipping habits of the big three, Michael Jordan, Scotte Pippen and Dennis Rodman. Jordan tipped 25%, Pippen tipped 10%. He was called "No Tippn' Pippen"--nobody wanted to wait on him. And word was you could make a weeks pay waiting on Rodman. He would ask you to get him a cigar and would tip $100. They fought over waiting on Rodman.
Posted by: Robert Wenzel at Aug 14, 2008 9:33:52 AM
The bar is also lower in cheaper restaurants -- good service is easier, and the same percentage tip is given for lesser service. For example, if I give bad service a 10% tip, mediocre service a 15% tip and good service a 20% tip, then I will give 15% or 20% to a waiter in a cheap restaurant even though he only served me food and filled my coffee - and he had a frown on his face. But if in a fancy restaurant the waiter only came over once, giving me food and filling my glass with a frown on his face, I might consider that very shabby service. If I wanted to reward service, that would certainly be 10% at best.
Posted by: liberty at Aug 14, 2008 9:55:51 AM
Jack: that's a major assumption about starving artists. Again, I think it depends on the restaurant, since professional servers (i.e., non-artists) are more likely to work at high-end restaurants.
It's interesting to think about your allocation of resources. Assuming you will tip only so much, where you put your money can have consequences like the ones Jack mentioned. I'm sure you're more likely to encounter a starving artist waiter in the East Village than Mid-Town.
Posted by: wallace stevens at Aug 14, 2008 10:04:00 AM
If you feel an irresistible urge to pay waiters by the hour, you had better face up to running a restaurant.
If you feel compelled to pay a percentage on top of the bill to the waiter, hadn't you better work out who you really wish to give away your money to? (If it is starving artists, OK, but is this the best route for the money?)
If you want to signal social status and resources, yeah giving waiters presents of some of your money may be a cost-effective way to do it (as compared to what alternatives?).
If you want to reward people who have given you good service, and induce them to give you good service in the future; then you tip well for goodc service and pointedly do not tip for poor service. That is rational consumer behaviour.
Posted by: Diversity at Aug 14, 2008 10:04:02 AM
For great service in a less expensive place I will tip as much as 50%, for rude obnoxious service any place I will tip as low as 0%. As a former cab driver, I have no problem leaving large tips in places where tipping is part of the compensation scheme and the service is cheerful and not treacly or oleaginous.
Was it Hemingway who left a $50 tip for lousy service and when the waiter started gushing, Hemingway said something like, "You should see how I tip for good service."
Posted by: at Aug 14, 2008 10:07:33 AM
This plan seems to hinge on waiters in better restaurants being less likely to spit in you food, should you ever return.
Posted by: dzot at Aug 14, 2008 10:14:10 AM
That seems to be a very poor choice of method for tipping, as well as one that completely misses the point of what you're paying for. If you go into a cheap restaurant than surely that idea makes sense; the waiters have lots of tables, they can't spend a lot of time schmoozing with the patrons, and so they make money by volume, ie - more turnover.
If you go into a fancy restaurant, you pay based on the service you get. You're made to feel good, you can ask lots of questions about the meals and the wine, etc., and you expect honest and knowledgeable answers. Especially when asking for suggestions or wine-food pairings. That is where a waiter in a fancy restaurant adds the most value and should be rewarded for it. Not based on the number of plates they bring out. And one shouldn't tip 20% on a $100 bottle of wine if all the waiter did was open and decant it. But if they told you everything you needed to know about the wine and suggested it along with food pairings then they deserve a lot more than 20%.
Posted by: Noah at Aug 14, 2008 10:15:25 AM
I wonder about how much information tips send, especially to the owner, about the quality of service the customers get.
An idea that came to me one insomnia-plagued night was to use the last digit of the tip amount to provide an explicit rating. This is easy to do if you pay with a credit card. Make the last digit a "1" for lousy service, and a "9" for super-duper outstanding. So tip $5.04, or $10.09, instead of $5.00 or $10.00. Don't use "0" at all, because it's ambiguous.
That would take a lot of noise out and give the owner a clearer picture of what was going on.
Posted by: Bernard Yomtov at Aug 14, 2008 10:15:59 AM
As a young person, I have to deal with waiters who give me poor service based on their preconceived notion that I will not tip well. I almost always tip 20%, except when the bill is less than 10$, then I will tip more. IE, half priced appetizers at Applebees costs about $3.50, and I will tip about $2. I tip the same way for bar service, about $2 per round.
When tipping by percentage, I feel really good about leaving 20% when the service was good, and I feel really bad about leaving any tip at all when the service was bad. I have a similar consumer surplus when tipping per round.
I think you have convinced me to start tipping based on my consumer surplus. (I will not blame you when I get into a bar fight with the waiters).
Posted by: brainwarped at Aug 14, 2008 10:20:04 AM
Okay... I will introduce you to my tipping scheme. Maybe 6 years ago or so I realized that me and everyone I knew pretty much tipped the same amount regardless of service- ~20%, maybe a little less. I also realized that this was insane, because we're talking about a TIP! A tip is given for good service. So, I dramatically increased the variance of my tipping. To compensate, I increased the average to a little over 20%. Now, I tip nothing for horrible service, all the way up to 35% for great service.
Now the key is to connect the tip, in the server's mind, to the quality of their service. So, I began to write comments on my receipt. Often, I leave letter grades as well. I figure this will indelibly connect everything in their mind. I will not bother with this procedure for decidedly average servers.
I really have no idea if this affects anything at all, but I feel it is the appropriate thing to do. Certainly when I get a really good server, they are happy to see me again. I also do take into account the size of the bill and amount of work required, to some extent. Higher percentage for lower bills on average, etc.
Posted by: Cliff at Aug 14, 2008 11:15:35 AM
Steven - I wouldn't want to eat any food that has been served to your table, at least if you have eaten at the restaurant before. Horrible tipping is remembered, and the poor sap who gets stuck with you will probably make you pay in some non-monetary way.
Posted by: liberarts at Aug 14, 2008 11:25:07 AM
If I wanted to spend my time worrying about the appropriate hourly rate for various types of restaurant employees, with the right skill levels for the type of restaurant, who will appeal to the target demographic in terms of appearance and demeanour, and how to motivate them and measure their performance...then I'd open a goddamn restaurant.
Since I haven't done that, take it as a signal that I don't want to worry about any of those things. I want the restaurant management to do their jobs and to take care of that and to build it in to their prices. I just want to answer one question - "Is the food and service worth the price?" Yes, I hate tipping. Life's too short to have to do other people's jobs for them!
Posted by: Dan Hill at Aug 14, 2008 11:26:15 AM
What the hell is wrong with you people.
15% - 20% of your final bill when eating out.
A dollar per drink per round, even for water, if you're at a bar.
This is not rational, it is cultural. Do this, or be a boor. It's your "rational choice" I guess... Gee, guys, why should I have to wear black to a funeral, I didn't know the guy that well, and I don't actually feel so sad, what gives? It's so irrational!!
I have been in a bar or a restaurant at leat 3x a week for my entire adult life and I can cound the number of times I've had "horrible" service on one hand; if you want to make excuses about not paying the people who serve you I'm sure there's always something to pick on ("oh, he didn't remember excatly what beer I had, SEVEN PERCENT FOR YOU HAHAHA suck on THAT")
I wouldn't presume to link up what I, personally, give the wait staff, with their future performance, becuase I am ~~rationally~~ aware that I'm one of thousands of people they'll see in a week, and so my leverage as some kind of Pavlovian trainer of good waiter behavior is basically nil. I really don't know how to say this w/o being snarky, but leaving a letter grade on a bill is a surefire way to "indelibly" brand you a complete jackass.
Waiters fake being happy and helpful for a living, here's a tip: they're humoring you!
Posted by: geoff at Aug 14, 2008 11:35:40 AM
I wouldn't presume to link up what I, personally, give the wait staff, with their future performance, becuase I am ~~rationally~~ aware that I'm one of thousands of people they'll see in a week, and so my leverage as some kind of Pavlovian trainer of good waiter behavior is basically nil
Geoff,
If you are going to a bar three times a week, and the waiters treat you as though they don't notice how frequently you are there--despite the "thousands" they serve, then then they think you are a jackass.
Posted by: Robert Wenzel at Aug 14, 2008 11:49:02 AM
I think my question posed to Tyler was: why is it set in stone that tipping is a totally variable cost when (1) the service quality does not necessarily increase in magnitude with the amount of the tip and (2) at some price level, the tip is disproportionate to any level of service? There seems a disconnect to me...
Posted by: Wayne at Aug 14, 2008 11:54:32 AM
There are a lot of bars and restaurants in this town, and thousands of servers. Some of them I know, most of them I don't. I always treat them politely, and they always treat me well in return. I tip because I like going out and appreciate what people do to make that happen. I don't have any illusions about being a big shot or being "memorable." And like I said, the service I've had as a whole has been really good.
Posted by: geoff at Aug 14, 2008 11:56:57 AM
Agreed with some of the above posters. Having worked as a waiter and a bartender, tipping 20% is customary for me, unless the service is really bad. But even then, it's hard for me to justify not giving the extra one or two bucks.
An argument in support of this position is that it's an accepted norm, as geoff points out. This creates an earnings expectation for waiters. If the expectation isn't met, two things happen. In the short run, waiters always have frowns on their faces and provide subpar service. In the long run, good waiters leave in pursuit of other jobs. Either way, a decrease in service quality is highly likely.
My question is tipping for drinks. I can't justify giving a $2 or $3 or even $5 to a bartender for fetching my drinks. It's much less work than waiting tables; in fact, it's almost no work at all (I am not talking about fancy cocktails).
Posted by: Axel Molotov at Aug 14, 2008 12:08:37 PM
I would counter Wayne with the fact that being a salesperson is part of the job.
Posted by: Matt at Aug 14, 2008 12:13:18 PM
