Ofer H. Azar, “The Economics of Tipping.” Journal of Economic Perspectives 34(2): 215-236, Spring 2020.
• Many features of tips make them hard to explain as a result of standard rational behavior.
• Tips are directly costly to those who give tips, but they are not mandatory – nor are tip practices identical around the world.
• The US has a reputation as a country where tipping takes on a rather prominent role.
• Some activities are tipped, but seemingly similar other activities might not be tipped.
• The practice of tipping as a percentage of the bill seems somewhat strange. And the typical percentage seems to creep up over time.
• Tips can be “rationalized” based on the potential for future interactions – but they occur in contexts (cabs, travel) in which such potential is minimal. And tipping does not take place in some repeated service situations, such as laundromats.
• Another attempted rationalization might be that tips occur in situations where the low-cost monitoring of employee behavior is provided by customers. But again, tip behavior does not seem to track this rationale very closely. (And when monitoring is difficult, it might be easy for employees to behave in a manner that will increase their tips but at the employer’s expense.)
• Maybe customers are willing to pay for their feeling of control?
• The not-uncommon claim by tippers of warm-glow from providing extra compensation to low-paid workers – is this a case of cognitive dissonance?
• Does tipping create price illusion that makes goods seem cheaper than they are? If so, then businesses that switch from tips to “equivalent” service charges or service-inclusive prices will be harmed.
• People often cite their tipping behavior as meeting a social norm. But it is a strange social norm: is it consistent with efficiency? Are there limits on how inefficient social norms can be before they cease being norms?
• Various nudges promote tips, including suggested tip levels or prominent tip jars.
• Sometimes tipping seems to be a sort of bad equilibrium: many people do not like tipping, but tip (or receive tips) anyway.
• “an explanation for tipping based on rational forward-looking consumers is not supported by the evidence. Instead, tipping is better explained as a result of psychological and social motivations of consumers who obey a social norm [p. 216].”
• [Incidentally, the pandemic surely has altered tipping behavior. In the US, for instance, tipping for take-away food has become common, when before Covid it was not a standard practice.]
