Who do we tip and why? An empirical investigation

Abstract

An important question about social norms is whether they are created to increase welfare. This is addressed by examining the characteristics of tipped and non-tipped occupations. Tipping prevalence is negatively correlated with worker's income and consumer's monitoring ability and positively with consumer's income and closeness between the worker and the consumer. The results refute a common belief that tipping exists to improve economic efficiency by lowering monitoring costs. Tipping, however, is more prevalent when consumers feel empathy and compassion for workers and want to show gratitude for good service, suggesting that tipping might increase welfare if welfare includes psychological utility.

Acknowledgements

I thank James Dana, Eddie Dekel, Ricky Lam, Michael Lynn, Ady Pauzner, Robert Porter, Michael Whinston and Asher Wolinsky for helpful discussions and comments. Financial support from The Center for the Study of Industrial Organization at Northwestern University is gratefully acknowledged.

Notes

 Another example for the distinction between the two service components appears in the questionnaire in the Appendix (see question 4). Other scholars have proposed additional ways in which servers’ roles can be divided: Israeli and Barkan (2004) stress the division between the technical and functional aspects of service, while Barkan and Israeli (2004) emphasize that servers have two roles with regard to tipping behaviour: the role of expert and the role of manager.

 Once tipping becomes the social norm in a certain situation, people may suffer a disutility from disobeying the norm (and they may derive a positive utility from conforming to the norm). This is not the source of utility referred to above, however, rather, a utility that one derives regardless of tipping is meant as the social norm.

 The idea that self-image may affect utility is not common in economics, but is not new either: Akerlof and Kranton (2000), for example, propose a utility function that incorporates identity as a motivation for behaviour, where identity includes both the category to which a person belongs and his self-image. Similarly, Loewenstein (1999) argues that self-esteem often motivates behaviour.

 The only variable on which one could hope to have formal data is the worker's income. There are two important reasons why ranking by the judges is used for this variable. First, no formal data were found about the income of many occupations in the list. Second, the perception of consumers about the worker's income is more important than the true income, because this perception is what (potentially) affects the consumer's willingness to tip the worker. The rankings by the judges represent the perception of various consumers.

 Increasing the number of judges further could decrease more the effect of any single judge on the scores, but the mean response and therefore the results are not likely to be significantly affected by such an increase.

 The answer to question 4 is 10p and the answer to question 5 is m in terms of Equation 1.

 The smaller coefficients of the independent variables when COMMON and IMPORTANCE are the dependent variables follow naturally from the narrower scale of these variables (0–5) compared to the scale of TIPPING (0–10).

 Since tips are voluntary payments and people tip also when they never intend to see the worker again, they obviously derive some kind of utility from tipping. Once tipping certain workers becomes a social norm, one may argue that the only utility is derived from conforming to the norm (or avoiding the disutility associated with disobeying the norm). But two observations suggest that people tip not only to conform to the norm: first, people often tip more than required by the norm. Second, the first people to tip in a situation that was not tipped before clearly did not conform to any social norm; on the contrary – they did something unique and uncommon. So they too had a reason for tipping other than conforming to the social norm. Azar (2004b) and the answers given in the survey mentioned earlier (Economic Development Committee for the Hotel and Catering Industry, 1970) also support the view that people derive utility from tipping beyond the conformity to the social norm.