23 Nov 2015

Tipping: Perfect Market Efficiency or Lazy Employers?

Olivia writes:*

In the Netherlands, I have often faced a moral dilemma when it came to paying the bill in restaurants. How do I tip? Back in Austria, it was straightforward: You just round up the number on the bottom of the bill, maybe add another Euro or two. But living in the Netherlands has made me used to paying by debit card – which makes the whole tipping procedure slightly tricky. Do I cross out the number on the bill and write down a new amount? Leave coins on the table? Or neither? Over time and by observing how my Dutch friends solve this dilemma, I got used to the latter option: I do not tip any more. Realizing this change in my behavior, I began wondering about apparently (one of economists' favorite topics): why do people tip in the first place? Explanations range from increasing market efficiency to the satisfying feeling of having done something good – but what I am interested in are the economic incentives for a better service based on tipping. Ignoring the studies that find that tipping is based on many other factors than the quality of service (check out Michael Lynn's research here if you are interested), what do these incentives theoretically mean for the parties involved?

The Customer

As the customer, I am the person to reward good service with a higher tip. At the cost of some extra-Euros, I (hopefully) benefit from better service. However, for a single customer it does not seem rational to give a tip: by the time you do, the service has already been performed and unless you are a frequent at the given bar, you are not likely to suffer from any future consequences. However, disappearance of tips on a larger scale could mean worse service for everyone. If there is no expectation of a reward anyways, why should the waiter or waitress bother to make a customer extra-happy?

The Waiter or Waitress

If tips are given as incentives, the quality of restaurant-service logically should decrease when costumers stop to give tips. From my two-country-comparison of Austria and the Netherlands, I have not observed any of the like – the service in both countries shows that there is a lot of variation between waiters and waitresses, which does not seem to be related to the habit of (non-) tipping in either country. Why would that be? Regardless of the whole waiter/waitress-customer-interaction, every waiter and waitress is still employed by the restaurant owner. Like in any other job, the main incentive to perform well is to not get fired. Tipping is in that case not part of the story.

The Restaurant Owner

From the restaurant owner's perspective, tipping is great. When one of his or her employees complains about their low wage, (s)he can simply refer to tips: “if you perform better, you get more tips” – tipping is used as a bonus paid by another party, the costumers. The restaurant owner thereby not only outsources part of the costs, but also the monitoring. Instead of checking each waiter's and waitress's performance in order to then warn or punish them, the costumer takes this role for the restaurant owner. “The market of good service and costumer tips is perfectly efficient,” the restaurant owner would argue. My conclusion on the other hand is that the restaurant owner is too lazy to deal with monitoring and providing other incentives.

Bottom Line:  Customer service would be just as fine without tipping, but restaurant owners would have to monitor their employees' performance better and consider other incentives for the waiters and waitresses to perform well.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.