ArticlePDF Available

Abstract and Figures

Tipping is an important economic phenomenon, involving about $47Â billion a year in the US food industry alone, and trillions of dollars across different occupations and countries over the years. Moreover, tipping is a major source of income for millions of workers. This article discusses the implications of tipping for business strategy in the relevant industries. For example, firms can choose to impose a compulsory service charge in lieu of tipping - what are the advantages and disadvantages of doing so? How does tipping change the profit-maximizing level of investing in screening job applicants, training workers, monitoring them, and providing performance-based incentives by the firm? Can industries such as the music industry use tips (i.e., prices being voluntary and determined by the customers) as an alternative business model?
Content may be subject to copyright.
Business strategy and the social norm of tipping
Ofer H. Azar
Ben-Gurion University of the Negev, Israel
article info
Article history:
Received 6 December 2010
Received in revised form 24 March 2011
Accepted 28 March 2011
Available online 6 April 2011
JEL classification:
M10
M50
D03
D10
L80
Z13
PsycINFO classification:
3000
3920
Keywords:
Tipping
Social norms
Business strategy
Service industry
Restaurant industry
abstract
Tipping is an important economic phenomenon, involving about $47 billion a year in the
US food industry alone, and trillions of dollars across different occupations and countries
over the years. Moreover, tipping is a major source of income for millions of workers. This
article discusses the implications of tipping for business strategy in the relevant industries.
For example, firms can choose to impose a compulsory service charge in lieu of tipping –
what are the advantages and disadvantages of doing so? How does tipping change the
profit-maximizing level of investing in screening job applicants, training workers, monitor-
ing them, and providing performance-based incentives by the firm? Can industries such as
the music industry use tips (i.e., prices being voluntary and determined by the customers)
as an alternative business model?
Ó2011 Elsevier B.V. All rights reserved.
1. Introduction
Social norms sometimes demonstrate how psychological motivations may affect economic behavior. One of the best
examples is the social norm of tipping. Tipping has been examined by researchers in many studies, but the economic and
managerial aspects of it have received relatively little attention, and are important issues that call for additional research.
The purpose of this article is to review the economic and practical implications of tipping for management and business
strategy, with the hope of encouraging others to contribute to this growing research area. Reviews of the tipping literature
that discuss additional issues that are beyond the focus of this article include Lynn and McCall (2000a, 2000b), Lynn (2006a,
chap. 31, 2006b), and Azar (2007b).
0167-4870/$ - see front matter Ó2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.joep.2011.03.018
Address: Department of Business Administration, Guilford Glazer Faculty of Business and Management, Ben-Gurion University of the Negev, P.O.B. 653,
Beer Sheva 84105, Israel. Tel.: +972 8 6472675; fax: +972 8 6477691.
E-mail address: azar@som.bgu.ac.il
Journal of Economic Psychology 32 (2011) 515–525
Contents lists available at ScienceDirect
Journal of Economic Psychology
journal homepage: www.elsevier.com/locate/joep
1.1. The economic magnitude of tipping
One reason for the importance of tipping in general and as a research topic in particular is its large economic magnitude.
The extent of tipping should be estimated, because tips are often unreported to the tax authorities; Hemenway (1993), for
example, mentions that the only income with a lower compliance rate than tipping is illegal income. Fortunately, we can
estimate the extent of tipping reasonably well at least in the US restaurant industry. The 2010 Statistical Abstract of the Uni-
ted States suggests that in 2009 (based on a projection) sales of food and alcoholic beverages to consumers amounted to
$564 billion. However, tipping is not a strong social norm in all eating places. Therefore, to be conservative, let us consider
only part of this amount, as follows. Sales in full-service restaurants were $182.9 billion; in snack and nonalcoholic beverage
bars – $19.9 billion; in bars and taverns – $17.1 billion; and in lodging places – $28.0 billion (US Census Bureau, 2010, Ta-
ble 1247). The sum of these numbers is $247.9 billion. Now the question is what is the average tip in percentage of the bill.
Research on US tipping in restaurants reports an average tip of 23.2% (Parrett, 2003, Table 14). However, it may be the case
that larger bills are tipped on average a smaller percentage, so to be conservative let us consider instead the average tip
amount in that study, which was $6.52, and the average bill size, which was $34.67. The ratio between the two numbers,
which is 0.188 (or 18.8%), is the weighted average tip (weighted by the bill size), as opposed to the simple average tip of
23.2% mentioned above. The product of 18.8% and $247.9 billion gives us an estimate for annual tipping in the US food indus-
try, $46.6 billion.
Moreover, tipping is common in other industries as well. Lynn, Zinkhan, and Harris (1993), for example, examine 33
tipped service professions. Tipping is also common in many countries in addition to the US, to the extent that there are even
books about tipping practices in different countries (e.g., Star, 1988) and travel guide books often mention the tipping prac-
tices in the destination country. Finally, tipping is not a very new phenomenon. Azar (2004b) reports that tipping in Europe
started hundreds of years ago, and significant tipping exists in the US for over a century. He mentions for example that ‘‘To-
wards the end of the 1890s, tipping was established in the United States, involving many workers and large amounts of
money. During the early 1910s it was estimated that five million workers in the United States, more than 10% of the labor
force, had tip-taking occupations. Tips were estimated to total $200–$500 million each year.’’ Adjusting for CPI the amount of
$200–$500 million gives a result of $4.4–$11.1 billion in today’s prices.
1
To correctly interpret this number, remember that the
US population in 1910 is estimated to be about 92 million, whereas in 2009 it is estimated at about 308 million.
2
The above
suggests that over the years (in today’s prices) and across different occupations and countries tips totaled to trillions of dollars.
In addition, tipping has a large impact on many people. Millions of US workers, for example, derive most of their income
from tips. Wessels (1997) reports that in the US, the primary occupation of more than two million workers is being servers
(in addition to many others who are servers in their secondary occupation). He adds that servers in full-course restaurants
earn 58% of their income from tips and those in counters earn 61% of their earnings in tips, and these figures are underes-
timations because tip income is often underreported.
Many others, such as taxi drivers, also obtain much of their income from tips. Post (1997, p. 538), for example, suggests
that ‘‘In general, a tip to a taxi driver is about 20 percent of the fare.’’ If the price of a ride is P(before the tip) and the costs of
the driver (fuel, depreciation, payment to the taxi company, etc.) are equal to C, then a 20% tip represents 0.2P/(1.2PC)of
the net income of the driver before tax, which is a number between 16.7% and 100% for 0 6C6P. If the driver does not report
tip income for tax purposes, then with respect to his net income after tax, the tip income will constitute even more than 0.2P/
(1.2PC) of the total net income.
1.2. Implications of tipping for other behaviors
Tipping is also interesting because it is puzzling from the perspective of traditional economic models. The usual assump-
tion in economics is that people are selfish and they maximize utility subject to a budget constraint by consuming the goods
and services that give them the highest utility. This assumption implies that consumers should not give up money unless
they receive goods or services in return. When people tip, however, the service has already been provided and therefore
the tip can no longer affect service quality. The consumer may still tip if he believes that this can improve the service he will
receive in the future. Many people, however, tip also when they travel and do not intend to return to the same establishment
again, and therefore future service considerations cannot be the reason for their tipping. It follows that tipping is a voluntary
payment that is not motivated solely by future service considerations, so why do people tip? This is the question that several
articles in the tipping literature try to answer (e.g., Azar, 2010; Lynn & Grassman, 1990). Azar (2010) suggests that the two
main reasons for tipping in restaurants in the US and Israel are that tipping is a social norm and that customers can use tip-
ping to show their gratitude for the service they received. Additional important motivations for tipping that Azar mentions
are that people know that waiters receive low wages and depend on tips, and that people report feeling guilty and embar-
rassed if they do not tip. Thus, tipping is motivated by several psychological and social considerations.
Research on tipping may allow us to better understand the role of such psychological and social motivations not only in
tipping behavior but also in other contexts. For example, giving donations and gift giving result at least partially from psy-
1
Information on the CPI in the US is available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt. The earliest CPI information reported there is for 1913.
For January 1913 the CPI reported is 9.8, and for June 2010 it is 217.965.
2
See http://www.npg.org/facts/us_historical_pops.htm and http://www.factfinder.census.gov/servlet/SAFFPopulation?_sse = on.
516 O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525
chological and social motivations such as generosity, altruism, reciprocity, inequality aversion, and a desire to follow social
norms. Similar motivations encourage people to tip, and hence research on the reasons for tipping might also shed some
more light on the behaviors of donating and gift giving. Indeed, some models can be applied to understand both gift giving
and tipping (Ruffle, 1999). Moreover, certain characteristics of charitable giving have equivalents in tipping. For example,
Gneezy, Gneezy, Nelson, and Brown (2010) conducted a field experiment in which subjects either paid a fixed price, or paid
what they wanted, for souvenir photos. Half the customers encountered a treatment in which half the revenue went to char-
ity. At the fixed price the charitable giving only slightly increased demand, whereas in the pay-what-you-want treatment,
the impact of the charity giving treatment on demand was much higher. This suggests that people have a stronger desire
to give to charitable giving when they have more control over that giving. This is similar to the finding from research on tip-
ping that shows that people prefer tipping over compulsory service charges, even when the service charge percentage is low-
er than what they voluntarily tip (Azar, 2010).
Another connection of tipping to other psychologically motivated behaviors is offered by Ruffle (1998), who finds a
behavior that resembles tipping in dictator and ultimatum games. Tipping is also related to the gift-exchange behavior that
was documented in many studies (e.g., Akerlof, 1982; Fehr, Kirchler, Weichbold, & Gachter, 1998), because in tipping, similar
to the gift-exchange context, one side gives a benefit to the other side (the waiter providing good service) and is rewarded for
that (with a tip).
Obviously, psychological and social motivations have a large role also in explaining the behavior of workers, managers,
consumers, etc., and thus certain aspects in tipping behavior are related to behaviors in various situations that are relevant
for management (in addition to the direct implications of tipping on management in tipped industries). Donations, for exam-
ple, are an important issue for various non-for-profit organizations and institutions (e.g., universities), and gift-exchange
behavior is an important issue in labor markets (Akerlof, 1982; Fehr et al., 1998) and therefore of interest to managers.
The advantage of tipping as a research topic is that it is a relatively simple context and therefore it allows for interven-
tions that may be difficult to do in complex settings such as the workplace. For example, a tipping experiment can involve
asking the waiter to touch the customer (Crusco & Wetzel, 1984; Hornik, 1992; Lynn, Le, & Sherwyn, 1998; Stephen & Zwei-
genhaft, 1986), introduce himself by name (Garrity & Degelman, 1990), or draw on the bill a happy face (Rind & Bordia, 1996)
or a sun (Gueguen & Legoherel, 2000), and examine how these behaviors affect tipping. The results can teach us something
about how one’s mood or closeness to another person affect generosity or reciprocity, and some conclusions may be more
general and apply also to non-tipping contexts. It is much harder to design similar interventions in the workplace, for exam-
ple, where one knows his co-workers for years. Similarly, we can examine how the gender of the customer and of the server
affect tipping, or how the physical appearance and attractiveness of the server affect tipping (Lynn, 2009), and some of the
insights are likely to be relevant also in other contexts. By examining the differences in tipping behavior between repeating
and non-repeating customers (Azar, 2007a, 2008) we can tell if people act strategically (tip today in a manner that will give
the server incentives to provide better service in the future), which may teach us something about behavior more generally.
Comparing tipping behavior in tables of one diner, two diners and six diners may provide insights about diffusion of respon-
sibility or the desire to impress others, both of which clearly have implications for other situations. Comparing characteris-
tics of occupations where tipping became a social norm to those of other occupations (Azar, 2005) can inform us whether
social norms tend to be created where they increase social welfare the most. Comparing tipping practices across different
countries (Lynn, 1997; Lynn et al., 1993) may show us how characteristics of a country affect its social norms. Examining
how a bad experience that does not result from the waiter (e.g., the kitchen was very busy and therefore it took a long time
to get the food) affects tipping can tell us whether angry people may punish a person regardless of whether the anger is the
latter person’s fault.
1.3. Strategy making in tipped service industries
Tipped service industries involve several interesting strategic decisions. There is almost no research that addresses these
issues, providing many opportunities for interesting and important future research. Are firms better off replacing tipping
with compulsory service charges, for example? Does the answer depend on whether the firm has to pay the tipped workers
a minimum wage in addition to their income from tips? If yes, what does this mean for the optimal minimum wage policy?
In Europe many restaurants changed from a regime of tipping to service charges (sometimes together with a small round-
ing up of the bill), while in the US and Canada the vast majority of restaurants use tipping. Who is right and who is wrong in
their decisions? Is it possible that the characteristics of the industry, workers and customers are so different in the two con-
tinents that the optimal regime is indeed different? And if yes, were these European firms wrong in the past when they did
use tipping, or have the relevant conditions in Europe changed over time in a manner that justified a change? Many US res-
taurants take an intermediary approach and use tipping in most cases but compulsory service charges (often called ‘‘gratu-
ity’’) for large parties (e.g., for tables of six or more diners) – is this an optimal policy, and if so, why?
Can tipping suffice as a screening device for job applicants, because bad workers will receive small tips and then quit their
jobs? Should the firm invest in monitoring tipped employees, or is tipping going to do the job without further investment by
the firm? Is it beneficial for the firm to impose tip-out arrangements (in which tipped workers share their tips with non-
tipped workers)? What about tip pooling arrangements, where workers in the same occupation (e.g., different waiters) share
their tips? These are a few examples for the impact of tipping on managerial decisions. Below I address some of these issues
in more detail.
O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525 517
2. A framework for analyzing the implications of tipping
To understand the implications of tipping for business strategy, it is helpful to understand the relationships between the
various players and issues that are related to tipping. Fig. 1 presents a diagram that provides a framework for analyzing the
implications of tipping. Below I explain the reasoning behind this framework.
One of the fundamentals of tipping is the reasons that motivate people to tip. These reasons affect customer behavior
regarding tipping, as well as his preferences, for example whether he prefers tipping to service charges or vice versa. The
customer’s behavior affects the tipped worker’s behavior; for example, if tips are sensitive to service quality, the worker
might exert more effort in order to provide better service and earn higher tips. The worker’s behavior also affects the cus-
tomer’s behavior, because the customer determines how much to tip based on the behavior and effort of the worker.
The customer’s preferences also have an impact on the firm’s decisions, for example if the customer has a strong resis-
tance to service charges, this is something the firm must take into account in its decision whether to impose service charges
instead of tipping. The firm’s decisions, in turn, affect the customer’s behavior. One obvious way is that if the firm imposes a
service charge, the customer no longer tips, or at least he tips much less than otherwise. But additional examples also exist. If
the firm collects all the tips and uses them to pay wages not only to the waiters but also to other workers, customers might
decide to reduce their tips (or maybe not to tip at all), because their goal of rewarding the waiter is not achieved even when
they tip.
The customer’s preferences may also affect governmental policymakers, for example if customers oppose tip-out arrange-
ments because they want their tips to reach their server, the policymakers might tend more to disallow tip-out arrange-
ments. The decisions made by policymakers, on the other hand, influence customers: if the law limits tip-outs, for
example, and therefore the customer knows that his tips indeed go to his waiter and not to other workers, this might encour-
age him to tip more.
The policymakers’ decisions obviously affect the firm, because these decisions often concern what the firm should do, for
example whether the firm should pay minimum wages in addition to tips or whether the firm can impose tip-out arrange-
ments. These same decisions naturally also affect the workers. In the opposite direction, the desires of the firms and those of
workers also affect policymakers, either because the latter are benevolent, or because firms and workers can put pressure on
policymakers.
Firms and workers also affect each other. The worker’s behavior determines service quality, which affects the sales of the
firm and its profits, for example. On the other hand, the firm decides how much to pay the worker and to what extent to
condition pay on performance, how much to train him, how to monitor and measure his performance, and so on.
Social welfare
Customer's
behavior,
preferences and
utility
Worker's
behavior and
income
Firm profits
and strategy
Reasons for
tipping
Governmental
public policy
Fig. 1. A framework for analyzing the implications of tipping.
518 O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525
The last component of the framework in Fig. 1 is social welfare. Social welfare is a common concept in economics, which
aims to encompass the total utility of the different parties involved in the market. Here, social welfare is the total of the cus-
tomer’s utility, the worker’s utility, and the firm’s profits, and therefore all three affect social welfare. The influence between
social welfare and public policy is different. The utility of policymakers is usually not included as part of social welfare, but
rather they are assumed to be the ones who choose a policy that will maximize social welfare. Therefore social welfare af-
fects public policy. In the other direction, the policies chosen by the policymakers also affect social welfare, but they do not
do so directly; the effect is indirect, through the impact of public policy on the firm, the worker and the customer.
3. Reasons for tipping
The framework above demonstrates that the reasons for tipping might have an effect on business strategy, because
the reasons for tipping affect tipping behavior, which in turn affects the worker and the firm. More specifically, tips can
create an incentive for tipped workers to exert more effort and improve service quality only if tips are sensitive to ser-
vice quality (Azar, 2009). Whether service quality affects tips depends on why the customer tips and whether he is a
repeating customer or not. For example, a customer is likely to tip more for better service if he tips in order to improve
future service or if he tips because this is the social norm and the norm is to tip more for better service. On the other
hand, if the norm is to tip a fixed percentage of the bill and the norm is the only motivation of customers for tipping,
then tips will not be sensitive to service quality and thus will lose their ability to motivate workers to exert more effort.
Consequently, the reasons for tipping have an effect also on the efficiency of tipping in improving service quality, which
in turn has implications for business strategy.
Another reason why the psychological motivations behind tipping can have implications for business managers is that the
latter can use information about tipping motivations and what increases tips to train their tipped service providers how to
earn larger tips, thus reducing the turnover of servers, retaining the most competent ones, and improving service and com-
pany performance (Lynn, 1996). Based on various studies of tipping, Lynn suggests that to increase their tips servers should
introduce themselves, squat near the table, smile, touch customers, use tip trays with credit-card insignia, and write ‘‘thank
you’’ or draw a happy face on customers’ checks. An additional incentive of the firm to help waiters increase their tips is that
doing so may (depending on minimum wage laws, among other things) allow the firm to reduce the wages of tipped employ-
ees and thus to increase its profits.
Various approaches are available for studying the reasons why people tip. One approach is to take actual tipping behavior
and examine it in light of what different tipping motivations predict. Lynn and Grassman (1990), for example, suggest that
the tipping behavior in their data is consistent with the use of tips to buy social approval and equitable relationships but not
with the use of tips to improve future service.
Customers who do not plan to come back to the same establishment and yet tip, as many people do in places where
this is the norm, clearly do not tip due to future service considerations. But what about repeating customers? Do they
tip because of future service considerations? On one hand, several studies report that repeating customers tip more than
non-repeating ones (Conlin, Lynn, & O’Donoghue, 2003; Lynn & Grassman, 1990; Lynn & McCall, 2000a). Bodvarsson and
Gibson (1997) found in a study with seven restaurants that regular customers (who visited the restaurant at least once a
month) tip more than non-regular customers. However, only in two of the seven restaurants the difference was statis-
tically significant. In addition, the difference was not very large – on average regular patrons tipped 1.05% more (of bill
size) than others.
3
The finding that regular customers tip more seems to suggest that at least with respect to regular cus-
tomers, future service does play a role in motivating them to tip. However, other interpretations for this finding also exist;
for example, Lynn and Grassman (1990) suggest about their finding that ‘‘This result is consistent with the idea that people
tip in order to obtain social approval from servers, because regular customers should value their server’s social approval
more than should non-regular customers.’’ Possibly regular customers tip more because this will make them feel more com-
fortable in their future visits to the restaurant, but not because they think that tipping more will improve the service they
receive in the future.
Additional support for the view that future service considerations do not affect tipping of regular customers is provided
by Azar (2007a). Azar presents a theoretical model that incorporates psychological utility associated with tipping (because it
is a social norm) and allows future service considerations to also motivate tipping. The model predicts that if future service is
a reason for tipping, the sensitivity of tips to service quality should be higher for repeating customers than for non-repeating
ones. Analysis of surveys of 597 restaurant customers, as well as prior studies (e.g., Lynn & Grassman, 1990), however, do not
find any evidence for a higher sensitivity of tips of repeating customers to service quality.
Azar (2004a) uses a slightly different approach – he tries to examine the reasons for tipping not based on tipping of indi-
vidual consumers, but rather based on the evolution of the tipping norm during the 20th century. He first develops a theo-
retical model about the evolution of social norms, which suggests that when a norm is costly to follow and people do not
derive benefits from following the norm other than avoiding social disapproval, the norm erodes over time. Using etiquette
3
Not all studies find evidence for significantly higher tips by regular customers, however. Kahneman, Knetsch, and Thaler (1986), for example, interviewed
people over the phone and asked one of two alternative questions. One question was ‘‘If the service is satisfactory, how much of a tip do you think most people
leave after ordering a meal costing $10 in a restaurant that they visit frequently?’’ The second question started the same but ended ‘‘...in a restaurant on a trip
to another city that they do not expect to visit again?’’ The mean responses in the two questions were $1.28 and $1.27.
O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525 519
books from different periods, Azar shows that tip percentages in restaurants and taxis increased over the years, suggesting
that people derive benefits from tipping in addition to the desire to follow the social norm (e.g., impressing others or improv-
ing one’s self-image as being generous and kind). Azar (2004b) reviews the early history of tipping – from sixteen-century
England to the US in the 1910s – and concludes that the reasons for tipping changed over the years, but conforming to social
norms and avoiding embarrassment were generally the main reasons.
Yet another approach to study the reasons for tipping is to ask people directly why they tip. Azar (2010), for example, asks
people to mark one or more out of seven potential motivations for tipping. In the US sample, the percentage of people indi-
cating each reason was as follows: I feel guilty if I don’t tip – 60%; I feel embarrassed if I don’t tip – 44%; Tipping in restau-
rants is the social norm in the US – 85%; By tipping I can show the waiter my gratitude for his service – 68%; Waiters get low
wages and depend on my tips to supplement their income – 67%; If I won’t tip, I will get poor service the next time I go to the
same restaurant – 14%; If I won’t tip, the waiter may yell at me – 4%. The high percentage of people who tip to show their
gratitude has implications for business strategy. Suppose that a restaurant changes from a tipping regime to a compulsory
service charge. Diners probably will not feel guilty or embarrassed not to tip when a service charge is already included in
their bill. However, customers who tip because this allows them to express their gratitude, will have to either give up this
showing of gratitude or pay for service twice – with both a service charge and a tip. The finding that a high percentage of
people tip to show gratitude is certainly an important consideration that restaurants should take into account when they
consider instituting a service charge in lieu of tipping.
4. Business strategy implications of tipping
Tipping has various implications for business strategy in certain industries (e.g., the restaurant industry). Casey (2001)
argues that tipping has important consequences for the relationships among managers, front-line service workers and cus-
tomers, as well as for relations among co-workers. In addition, she suggests that tipping may influence employee commit-
ment, teamwork and motivation, and she argues that while tipping allows reduced labor costs, it may undermine the
relationship between managers and staff because the customer becomes the one who provides monetary rewards and feed-
back to the servers. Schwartz (1997) suggests that tipping may exist because it increases the firm’s profits. Using a theoret-
ical economic model, he shows that tipping can increase the firm’s profits when consumer segments differ in their demand
functions and their propensity to tip. He then argues that this theoretical framework can also serve as a useful tool for man-
agers in selecting a tipping policy for their firms.
4.1. Tipping as a form of customer monitoring on the service worker
A few studies examine tipping as a form of monitoring by the customer over the worker’s performance, which may re-
place monitoring by the firm. Jacob and Page (1980), for example, argue that in some cases firms will use both buyers
and owners to supervise employees. As examples they mention tipped waiters, who are monitored and paid by the owners
but also by the customers, and commission-sales clerks who supervisors monitor. Azar (2004c) analyzes the optimal choice
of monitoring intensity by the firm when workers face external incentives (incentives that are not provided by the firm),
such as tips, the desire to build reputation in order to be more attractive to other employers, or satisfaction from working
well. A theoretical model he develops suggests that an increase in such external incentives reduces optimal monitoring
intensity but nevertheless increases the worker’s effort and the firm’s profits. This implies that firms benefit when tipping
becomes more sensitive to service quality, and in particular they are better off with tipping than with compulsory service
charges (since the latter is not sensitive to service quality). This finding is consistent with the observation that US firms sup-
ported the establishment of tipping in the late 19th century. The analysis suggests, however, that the change in many Euro-
pean restaurants over the last few decades, in which service was added to the prices and tipping was abolished, is
detrimental to the restaurant’s interests.
Azar (2005) addresses the topic of tipping as buyer monitoring of workers from another angle. Others have previously
argued that economists believe that tipping exists because it is the most efficient way of monitoring and rewarding the
efforts of service workers (Lynn & McCall, 2000a). Azar tries to examine if a comparison of tipped and non-tipped occu-
pations supports this view. In other words, has tipping become a social norm in occupations where the customer has the
largest advantage over management in the ability to monitor service workers? Creating a list of 37 tipped and non-
tipped service occupations and using various books that include information about tipping, Azar ranks the extent to
which each occupation is tipped, based on how prevalent tipping is in that occupation and how much of the worker’s
income is obtained from tips.
4
Six different judges ranked various characteristics of each occupation. Regressing the extent
of tipping on the occupation’s characteristics suggests that tipping prevalence is negatively correlated with the worker’s
income and the customer’s monitoring ability and positively with the customer’s income and the closeness between the
worker and the customer. The negative correlation of tipping prevalence with the customer’s monitoring ability shows that
tipping is not created only in those occupations in which its ability to improve economic efficiency by lowering monitoring
4
For example, tipped occupations include restaurant waiters, taxi drivers, and pizza delivery persons, whereas non-tipped occupations include accountants,
flight attendants, bus drivers, and sellers at McDonald.
520 O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525
costs is maximal. The results support the hypothesis that tipping is motivated by psychological utility due to the willing-
ness to reciprocate and to show gratitude and due to empathy for the worker. In situations where customers develop a
closer proximity to the worker, for example, their empathy for the worker and their desire to reciprocate and to show their
gratitude are probably higher, and this possibly helped to create tipping in these occupations more than in others.
Azar (2009) also addresses the claim that tipping improves service quality and increases economic efficiency because it
allows to avoid costly monitoring of workers. He uses a simple model to show formally that tips can improve service only if
they are sensitive enough to service quality. However, evidence in several previous studies suggests that the actual sensitiv-
ity of tips to service quality is very small. Nevertheless, despite the prediction that this should lead to low service quality,
rankings of service quality by restaurant customers in various studies were very high. Azar calls this co-existence of low sen-
sitivity of tips to service quality and high service quality ‘‘the tipping – service puzzle,’’ and offers several possible explana-
tions for the puzzle.
4.2. Tipping as an implicit contract
Conlin, Lynn, and O’Donoghue (2003) claim that if efficiency requires the waiter to exert some effort, the waiter should
have an incentive to exert this effort. While a service contract can provide this incentive, writing such a contract between the
waiter and customer involves large transaction costs. Tipping, they argue, serves as a substitute that saves these transaction
costs.
Azar (2007c) agrees with their view, but argues that tipping can save not only the costs of writing a contract, but also the
costs of its enforcement. He suggests that these enforcements costs are the more important ones. While writing a contract
between each customer and worker is very costly, the firm could write a standard contract that applies to all of its workers
and customers. The main problem, Azar claims, is therefore the enforcement of such a contract: who will monitor the service
quality? Will the customer need to demonstrate that service quality was not satisfactory, or the worker to show that service
was good? How can one verify what the service quality was when service is personal and depends also on the friendliness of
the worker? Azar suggests that society, by creating the social norm of tipping and making people who do not tip appropri-
ately feel embarrassed and unfair, provides an efficient enforcement mechanism. People then tip without the need for third
party involvement in the evaluation of service quality, because their emotional disutility if they do not tip after receiving
good service exceeds their monetary gains.
4.3. Tip pooling
One of the issues on which the management of a restaurant has some control is the tip pooling policy. Tip pooling
refers to the practice of sharing tips between workers of the same type, for example sharing tips equally among all the
waiters on a certain shift. The restaurant management can impose tip pooling, disallow it, encourage it, or leave it en-
tirely to the decision of the waiters. Tip pooling have both advantages and disadvantages from the restaurant’s perspec-
tive. On one hand, tip pooling reduces the volatility of the waiters’ income, which the waiters and therefore the
restaurant might view as a benefit, and even more importantly, tip pooling encourages cooperation between waiters.
If one waiter is busy with one of his tables and another table of him waits, a free waiter will be more willing to fill
in for the busy waiter and serve that table if he gets part of the tips from that table (as in tip pooling) than if he does
not. On the other hand, sharing tips means that the monetary rewards to exerting a lot of effort and providing excellent
service, which are already small as was discussed before, become even smaller, because the increase in tips due to better
service is shared with many other workers. As a result, tip pooling can give rise to a situation where each waiter’s opti-
mal behavior is to exert very little effort.
Two possible ideas may allow to give incentives for mutual help and cooperation without creating a severe free-riding
problem. One is to make it public information among the waiters how much each of them earned in tips and brought to
the common pool. Doing so will create social pressure and waiters will be ashamed to free ride on others’ efforts if later
everyone else finds out that they earned the lowest tips. A second idea is to use tip pooling in small groups. That is, not
to share the tips of all the restaurant waiters or all the waiters on a shift, but to create teams of 2–3 waiters on a certain
shift that work together and help each other and will also share their tips. The reduction of individual incentives to provide
excellent service in this case is not as large as in tip pooling between many workers, and therefore the potential for free rid-
ing is less severe.
If waiters can observe each other, this might help in using tip pooling without a severe free-riding problem. Barkan, Erev,
Zinger, and Tzach (2004) present an interesting study that addresses this idea. They examine the effect of tip policy and vis-
ibility on service quality in cafes. Applying social dilemma research to cafes suggests that service quality may deteriorate by
two types of free-riding behavior: reduced effort and overuse of limited common resources. The theoretical framework im-
plies that solving both problems simultaneously is difficult. An individual tip policy can solve the problem of reduced effort
as it motivates each server to work harder for his own tip, but it intensifies the competition between the servers over limited
common resources. Shared tip policy does the opposite. Similarly, visibility conditions (to what extent waiters can see each
other) affect the two free-riding behaviors in opposite ways. Two field studies indicate that tip policy and visibility are inter-
acting and that quality service can be attained with two combinations: individual tip policy with low visibility, or shared tip
policy with high visibility.
O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525 521
4.4. Screening and training workers
Another practical question that tipping raises is whether or not the optimal level of investment in screening workers
changes as a result of tipping. Can businesses invest less in screening employees in tipped occupations (compared to their
investment in other cases) because the workers who will not perform well will receive small tips and quit, while the best
workers will enjoy large tips and stay? It seems reasonable that self-selection of workers where ones with high service capa-
bilities go to tipped occupations and others choose different jobs can replace some of the firm’s screening efforts, but this
idea calls for additional research.
Similarly, tipping might affect the optimal level of training workers. The employer can buy its workers relevant guide
books that teach them how to perform their tasks (e.g., Arduser & Brown, 2004). Tipped employees may have more incen-
tives than non-tipped employees to actually invest time in learning these guides, and consequently the employer might be
able to invest less in formal training of tipped employees.
4.5. Tipping as an alternative business model
Can tipping serve as an alternative business model of generating revenues in industries that today use ordinary sales
(sales with formal posted prices)? Woodhead (2000) suggests using tips as a payment mechanism for intellectual prop-
erty posted on the Internet, in particular for music and books. The idea is that musicians and authors will post on the
Internet music and books, and ask customers who enjoy these to tip. Based on a website that was funded mainly by
such tips paid by users, Woodhead believes that people would tip for the use of intellectual property, especially if they
tip a person (a musician or an author) and not a corporation. This idea seems to be applicable also to other types of
intellectual property (e.g., software), and should be considered, at least as an experiment, by managers in the relevant
industries. Notice that any case in which something is sold for a price that is left to the discretion of the buyer (where
the buyer can also decide not to pay at all) can be thought of as tipping, just as restaurant tipping is paying for service
where the level of payment is left to the discretion of the customer.
Indeed, the recent experiment of the English rock band Radiohead is an application of this idea. In 2007, Radiohead an-
nounced that they would release their seventh album, ‘‘In Rainbows,’’ on their Web site and allow their fans to set their own
price (Lane, 2007). As Lane mentions, ‘‘The move was heralded in the music press and among the band’s fans as a paradigm-
shifting moment, one that could fundamentally reshape the structure of the music industry and help put an end to the ram-
pant ripping and sharing of digital music.’’ Virginia-based comScore, a firm specializing in the measurement of online activ-
ity, suggests that over a period of 29 days, approximately 1.2 million people visited the ‘‘In Rainbows’’ site, and a significant
percentage of them downloaded the album. Of those who downloaded the music, 62% did not pay anything, and 38% paid
between a penny and $20. The average amount paid, including those who paid nothing, was $2.62 for each copy of the album
downloaded. It is hard to tell, however, whether the revenues that Radiohead earned were lower or higher than what they
would have earned with a standard distribution of the new album.
4.6. Tips as a performance measure
Using tips to measure performance is another topic related to how tipping and management are related. Lynn (2001)
quotes two restaurant owners and a restaurant internal document, suggesting that restaurant owners consider tipping as
a system that gives incentives to waiters to make effort and provide good service, that tip averages are the most effective
way to measure a server’s capabilities, and that small tips can help to identify customers who think they did not receive good
service.
Whether restaurants can and should use tip income as a measure of waiter performance is an interesting question. Mea-
suring waiter performance using tip income can be problematic for at least two reasons. First, the relationship between ser-
vice quality and tip size is rather weak. This means that tip income may be affected more by other factors that are unrelated
to service quality than by service quality, and then tip income cannot serve as a good measure of waiter performance. Sec-
ond, many studies show that various waiter behaviors that are not necessarily related to service quality affect tipping. For
example, Lynn and Mynier (1993) report that squatting during the initial visit to the table increases the waiter’s tip, and
Gueguen and Legoherel (2000) report that clients ordering espresso coffee in bars tipped more often and larger amounts
when the waiters drew the sun on their bill.
4.7. Extracting workers’ economic rents
In some industries such as the restaurant industry, tip income can be so high that the workers earn much more than the
minimum they would require in order to stay in their job. They enjoy what economists call economic rents. A nice illustra-
tion of these economic rents was provided to me when I corresponded with a restaurant owner in California who decided to
change from tipping to a compulsory service charge. He wrote to me that ‘‘Before starting this service charge, our servers
were making, on average, over TWICE the wage of the cooks, and while servers require only a few months of training,
our cooks require 2–5 years!’’.
522 O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525
The restaurant’s management in such cases has an incentive to try to extract this economic rent from the waiters in
order to increase the restaurant’s profits. In the early history of tipping, restaurants sometimes did so by charging the
waiters for the privilege to work in their restaurant and earn tips (Azar, 2004b). Today such an action will violate min-
imum wage laws in many countries, but restaurants can impose a compulsory service charge in lieu of tipping. This al-
lows the restaurant to take the service charge and pay the waiters less than they would otherwise have earned from tips
(or from tips plus wage where minimum wage laws require to pay wages despite high income from tips). Another op-
tion of a restaurant where waiters enjoy high income is to hire more waiters and let each one serve fewer tables. If tip
income is high enough and the restaurant need not pay full wages on top of the tips due to minimum wage laws, the
cost to the restaurant of doing so may be negligible. The restaurant can gain from this step because by serving fewer
tables the waiter can provide better service, and this may allow the restaurant to attract more customers and maybe
also to increase its prices, thus increasing its profits.
Another strategy the restaurant can try to adopt to extract the economic rents from the waiters is to distribute part of
their tips to other employees who are not tipped (e.g., cooks or dishwashers). Then the restaurant can reduce the wages
of these other employees. This sort of arrangements is called tip-out arrangements. In the United States, however, the Fair
Labor Standards Act states that tipped employees cannot be forced by employers to share tips with employees who do not
ordinarily participate in tip pooling arrangements (such as janitors and dishwashers). Moreover, if a pooling agreement goes
above 15 percent of the tips, the Department of Labor will investigate to assure that the pooling agreement is ‘‘customary
and reasonable.’’ In addition, several states accepted laws that prohibit tip pooling (Wessels, 1997). Firms can try to bypass
these limitations by requiring the workers who enjoy the economic rent (e.g., the waiters) to perform also tasks that do not
yield tip income instead of other workers (e.g., dishwashers), and fire these other workers (Wessels, 1997).
4.8. Adopting compulsory service charges
One of the major decisions businesses in industries where tipping is common have to make is whether to impose a
compulsory service charge instead of tipping. Another option, adopted by many US restaurants, is to use compulsory
service charges for large parties (e.g., for tables of six or more diners), but leave tipping for smaller parties. Consider-
ations exist both in favor of tipping and in favor of service charges, making this decision substantive. Tipping has certain
advantages over service charges. First, most customers prefer tipping to service charges (Azar, 2010). Second, tipping
might allow saving on the costs of monitoring waiters and giving them incentives to provide excellent service, and pos-
sibly in some occupations even costly monitoring by the employer will not achieve the same level of monitoring that
can be obtained when the customer monitors the service and rewards or punishes using his tip. Finally, because the
customer has the potential to punish the worker, this might prevent certain events (admittedly rare ones), for example
a waiter in a restaurant forgiving to provide service to a customer for a long time, and the customer leaving the restau-
rant as a response. With tipping, the customer might avoid such extreme behavior and instead punish the waiter by not
tipping him at the end of the meal.
The advantage of service charges from the perspective of restaurant owners is that they allow the restaurant to extract the
economic rent from the waiters. Indeed, this is a point where legislation might have a significant impact on business strat-
egy. If the law says that tipped workers should receive minimum wages in addition to their tip income, this increases the
economic rents of waiters. This can cause restaurants to move from tipping to service charges, because then the restaurant
can use the service charges to pay the waiters’ wage (and the restaurant does not have to pay this out of the menu price), and
may even find that the service charges are higher than the wages it has to pay to waiters and keep the difference as addi-
tional profits. This is even more likely to happen if the restaurant’s ability to use tip-out arrangements as a way to extract the
waiters’ economic rent is limited by law (as it is in the US). Ironically, attempts of legislators to protect the economic rents of
waiters by requiring employers to pay them minimum wages in addition to tips and by limiting the possibility of tip-out
arrangements can therefore lead the restaurant to change its policy from tipping to a compulsory service charge, which hurts
the waiters. In Israel, for example, a court decision that ruled that workers should receive minimum wages in addition to
their tips resulted in some restaurants replacing tips with service charges (Sinay, 2001).
In the US, the federal law before the Fair Minimum Wage Act of 2007 requires employers to pay a minimum of $5.15 per
hour. Tipped workers should also have total income (from wages and tips) of at least $5.15 per hour, but their wages could be
reduced up to $2.13 an hour, using what is called ‘‘tip credit’’ towards the $5.15 minimum wage. Some states adopted dif-
ferent laws, however (Azar, 2003), in some cases not allowing for any tip credit (i.e., tipped workers have to receive at least
the minimum wage, in addition to their tips). This may be one of the reasons why many restaurants adopt service charges for
large parties. This is also the background for the decision of a restaurant in California whose owner corresponded with me to
move from tips to service charges, so that the restaurant can pay its cooks a higher wage at the expense of the waiters (who
previously had income over twice that of the cooks, as was cited above). As the restaurant’s owner wrote to me,
‘‘I’m in California, and you probably know that the state law is strict about not allowing mandatory tip-sharing with
cooks, and also no ‘‘tip credit’’ against minimum wage. I fretted about this for YEARS and finally realized that there
was NO OTHER WAY to correct these imbalances (which actually threaten our survival due to the high skill requirements
for cooks) EXCEPT instituting a service charge and using that to re-allocate resources in a way that works better for the
business and the ‘‘team’’ of employees as a whole.’’
O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525 523
From a social welfare perspective, an added benefit of service charges is their effect on tax compliance. Tips are often
unreported for tax purposes (Hemenway, 1993). Tax avoidance on tip income is a zero-sum game in the sense that a dollar
of tip income not reported by workers to the tax authorities is a loss to the other taxpayers, but a gain to the worker. How-
ever, if we believe that society in general is better off in an equitable situation where everyone pays according to the tax
rules, then a regime of service charges may increase social welfare, because service charges are more formal than cash tips
and are documented in the restaurant’s receipts and accounts, making it easier to verify proper tax payments.
5. Conclusion
Tipping is an important phenomenon that involves billions of dollars and entails many implications for business strategy
in some industries. One important decision the firm has to make is the choice between tipping and a compulsory service
charge. Another implication of tipping is that it may affect the optimal levels of monitoring and performance-based incen-
tives that the firm should provide. This article discusses the implications of tipping for business strategy in tipped industries.
Many of these implications require further study. The hope here is that this article will encourage other researchers to con-
tribute further to the literature on tipping in general and in particular on the business implications of tipping.
References
Akerlof, G. A. (1982). Labor contracts as partial gift exchange. Quarterly Journal of Economics, 97(4), 543–569.
Arduser, L., & Brown, D. R. (2004). The waiter & waitress and wait staff training handbook: A complete guide to the proper steps in service for food & beverage
employees. Atlantic Publishing Company (FL).
Azar, O. H. (2003). The implications of tipping for economics and management. International Journal of Social Economics, 30(10), 1084–1094.
Azar, O. H. (2004a). What sustains social norms and how they evolve? The case of tipping. Journal of Economic Behavior and Organization, 54(1), 49–64.
Azar, O. H. (2004b). The history of tipping – From sixteenth-century England to United States in the 1910s. Journal of Socio-Economics, 33(6), 745–764.
Azar, O. H. (2004c). Optimal monitoring with external incentives: The case of tipping. Southern Economic Journal, 71(1), 170–181.
Azar, O. H. (2005). Who do we tip and why? An empirical investigation. Applied Economics, 37(16), 1871–1879.
Azar, O. H. (2007a). Do people tip strategically, to improve future service? Theory and evidence. Canadian Journal of Economics, 40(2), 515–527.
Azar, O. H. (2007b). The social norm of tipping: A review. Journal of Applied Social Psychology, 37(2), 380–402.
Azar, O. H. (2007c). Why pay extra? Tipping and the importance of social norms and feelings in economic theory. Journal of Socio-Economics, 36(2), 250–265.
Azar, O. H. (2008). Strategic behavior and social norms in tipped service industries. The BE Journal of Economic Analysis & Policy (Topics), 8(1) [Article 7].
Azar, O. H. (2009). Incentives and service quality in the restaurant industry: The tipping – Service puzzle. Applied Economics, 41(15), 1917–1927.
Azar, O. H. (2010). Tipping motivations and behavior in the US and Israel. Journal of Applied Social Psychology, 40(2), 421–457.
Barkan, R., Erev, I., Zinger, E., & Tzach, M. (2004). Tip policy, visibility and quality of service in cafes. Tourism Economics, 10(4), 449–462.
Bodvarsson, O., & Gibson, W. (1997). Economics and restaurant gratuities: Determining tip rates. American Journal of Economics and Sociology, 56(2),
187–203.
Casey, B. (2001). Tipping in New Zealand’s restaurants. Cornell Hotel and Restaurant Administration Quarterly, 42, 21–25.
Conlin, M., Lynn, M., & O’Donoghue, T. (2003). The norm of restaurant tipping. Journal of Economic Behavior and Organization, 52, 297–321.
Crusco, A. H., & Wetzel, C. G. (1984). The midas touch: The effects of interpersonal touch on restaurant tipping. Personality and Social Psychology Bulletin, 10,
512–517.
Fehr, E., Kirchler, E., Weichbold, A., & Gachter, S. (1998). When social norms overpower competition: Gift exchange in experimental labor markets. Journal of
Labor Economics, 16(2), 324–351.
Garrity, K., & Degelman, D. (1990). Effect of server introduction on restaurant tipping. Journal of Applied Social Psychology, 20, 168–172.
Gneezy, A., Gneezy, U., Nelson, L. D., & Brown, A. (2010). Shared social responsibility: A field experiment in pay-what-you-want pricing and charitable
giving. Science, 329, 325–327.
Gueguen, N., & Legoherel, P. (2000). Effect on tipping of barman drawing a sun on the bottom of customers’ checks. Psychological Reports, 87, 223–226.
Hemenway, D. (1993). Prices & choices: Microeconomic vignettes (3rd ed). Lanham, MD: University Press of America.
Hornik, J. (1992). Tactile stimulation and consumer response. Journal of Consumer Research, 19, 449–458.
Jacob, N., & Page, A. (1980). Production, information costs, and economic organization: The buyer monitoring case. American Economic Review, 70(June),
476–478.
Kahneman, D., Knetsch, J. L., & Thaler, R. (1986). Fairness as a constraint on profit seeking: Entitlements in the market. American Economic Review, 76,
728–741.
Lane, F. (2007). Radiohead download experiment has mixed results. <http://www.toptechnews.com/story.xhtml?story_id=0120013PAVDC&page=1>.
Lynn, M. (1996). Seven ways to increase servers’ tips. Cornell Hotel and Restaurant Administration Quarterly, 37, 24–29.
Lynn, M. (1997). Tipping customs and status seeking: A cross-country study. International Journal of Hospitality Management, 16(2), 221–224.
Lynn, M. (2001). Restaurant tipping and service quality: A tenuous relationship. Cornell Hotel and RestaurantAdministration Quarterly (January), 14–20.
Lynn, M. (2006a). Tipping in restaurants and around the globe: An interdisciplinary review. In M. Altman (Ed.), Handbook of contemporary behavioral
economics: Foundations and developments (pp. 626–643). M.E. Sharpe Publishers.
Lynn, M. (2006b). Race differences in restaurant tipping: A literature review and discussion of practical implications. Journal of Foodservice Business Research,
9(4), 99–113.
Lynn, M. (2009). Determinants and consequences of female attractiveness and sexiness: Realistic tests with restaurant waitresses. Archives of Sexual
Behavior, 38, 737–745.
Lynn, M., & Michael, M. (2000b). Beyond gratitude and gratuity: A meta-analytic review of the predictors of restaurant tipping. Working paper, School of Hotel
Administration, Cornell University.
Lynn, M., & Grassman, A. (1990). Restaurant tipping: An examination of three ‘rational explanations’. Journal of Economic Psychology, 11(June), 169–181.
Lynn, M., Le, J.-M., & Sherwyn, D. S. (1998). Reach out and touch your customers. Cornell Hotel and Restaurant Administration Quaterly, 39, 60–65.
Lynn, M., & McCall, M. (2000a). Gratitude and gratuity: A meta-analysis of research on the service-tipping relationship. Journal of Socio-Economics, 29,
203–214.
Lynn, M., & Mynier, K. (1993). Effect of server posture on restaurant tipping. Journal of Applied Social Psychology, 23(8), 678–685.
Lynn, M., Zinkhan, G. M., & Harris, J. (1993). Consumer tipping: A cross-country study. Journal of Consumer Research, 20(December), 478–485.
Parrett, M. B. (2003). The give and take on restaurant tipping. Ph.D. dissertation, Virginia Polytechnic Institute and State University.
Post, P. (1997). Emily post’s etiquette (16th ed.). New York: HarperCollins.
Rind, B., & Bordia, P. (1996). Effect on restaurant tipping of male and female servers drawing a happy, smiling face on the backs of customers’ checks. Journal
of Applied Social Psychology, 26(3), 218–225.
Ruffle, B. J. (1998). More is better, but fair is fair: Tipping in dictator and ultimatum games. Games and Economic Behavior, 23, 247–265.
524 O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525
Ruffle, B. J. (1999). Gift giving with emotions. Journal of Economic Behavior and Organization, 39, 399–420.
Schwartz, Z. (1997). The economics of tipping: Tips, profits and the market’s demand-supply equilibrium. Tourism Economics, 3(3), 265–279.
Sinay, R. (2001). Trying to protect waiters reduces their income, Ha’aretz, June 4 [in Hebrew].
Star, N. (1988). The international guide to tipping. New York, NY: The Berkeley Publishing Group.
Stephen, R., & Zweigenhaft, R. L. (1986). The effect on tipping of a waitress touching male and female customers. Journal of Social Psychology, 126(February),
141–142.
US Census Bureau (2010). The 2010 statistical abstract. <http://www.census.gov/compendia/statab/>.
Wessels, W. J. (1997). Minimum wages and tipped servers. Economic Inquiry, 35, 334–349.
Woodhead, R. (2000). Tipping – A method for optimizing compensation for intellectual property. <http://tipping.selfpromotion.com/>.
O.H. Azar / Journal of Economic Psychology 32 (2011) 515–525 525
... Lynn, 2006). Authors have affirmed tipping's economic value and importance as additional income source (Azar, 2011), and as a means to increase service quality (Lynn, 2001), server loyalty to a specific restaurant (Lynn, 2002), or customer satisfaction (Lynn, 2018). The literature also discusses tipping's downsides in terms of reduced wages (Shy, 2015), tax evasion (Anderson & Bodvarsson, 2005;Schmidgall & Tarras, 1995), and as a source of inequality and harassment (e.g. ...
... Where tipping is a norm, economic implications will be significant. Azar (2011) estimated, on the basis of data from the US Census Bureau, that annual food sales in restaurants, bars and accommodation in the USA amounted to US$247.9 billion, with close to one fifth (18.8%; US$46.6 billion) of the total contributed by tips. ...
... The estimate is that servers in US restaurants earn 58-61% of their earnings in tips (Wessels, 1997), and sometimes up to 100% of their discretionary income (Mansfield, 2016). This situation is fundamentally different in other parts of the world, where tipping is unknown, even frowned upon, or discouraged for reasons of income stability, to avoid inequality and harassment, tax evasion, or because the practice interferes with cultural norms or minimum wage considerations (Azar, 2011;Lynn, 2018). ...
... Tipping is a common practice in many societies. In the US, tipping generates over $45 billion in annual revenue (Azar, 2011). In restaurants, the tip size typically varies between 10% and 20% of the total bill (Karabas et al., 2020). ...
... Conversely, the physical presence of the frontline employee during the payment stage can hamper customers' willingness to tip. Tipping and donations share similar characteristics (Azar, 2011). For instance, in the context of door-to-door charitable giving, DellaVigna et al. (2012) report that when potential donors are exposed to an unsolicited donation request, their willingness to donate decreases. ...
Article
Many service providers explicitly ask customers for a tip. This may create social pressure, thus resulting in lower tips. Building on the theory of psychological reactance, we propose that an explicit request to tip has a detrimental impact on tip size. Across two studies, a field experiment and an online experiment, we test this effect and examine how the physical presence of the server moderates this relationship. We find that an explicit request to tip negatively affects tip size, while server’s physical presence alleviates this effect. The findings also show that social pressure hampers perceived control, which in turn has a detrimental effect on tip size. In light of these findings, service providers might want to revisit their strategies to enhance tipping.
... Most authors agree that the tip is directly dependent on the quality of service providof employees in the hospitality industry. In America, there has long been a custom of giving tips (Whaley, Douglas and O'Neill, 2014), that is, tips are so present in people's lives that they represent a very important industry and a direct source of income for millions of people today (Azar, 2011). The issue of tips in the hospitality industry is associated by many authors with motives as internal factors that drive an individual to achieve a certain goal (DuBrin, 2002). ...
Conference Paper
Full-text available
Objective: The purpose of this paper was to determine whether tipping could reduce labor costs in the service sector. This research aims to better un­derstand whether employees are more motivated to work because of the tip they receive. Methodology: We will achieve these goals based on the findings of the research from Slovenian and Montenegrin companies in 2019 and 2020. A quantitative survey was implemented on a convenience sample of 107 Slove­nian, and 59 Montenegrin companies, using the non-probability sampling technique. Statistical data analysis was carried out with the help of IBM Sta­tistic Package for Social Science (SPSS) software version 20. We investigated the area of tips from the point of view of the orderliness of the distribution of tips, what are the relations in Slovenia and Montenegro and whether the tip as a motivational activity is sufficiently used in these two countries. Originality: Tipping has received little attention in rewarding and motivat­ing employees. Furthermore, there is no good, national source of guidance to help managers make decisions about tipping policies. This paper addresses these voids in Slovenia and Montenegro. Only a comprehensive discussion will be able to bridge this gap. Results: According to employees, the overall satisfaction with tips is better in Montenegro. Most employees allow the collection of tips, which is more present in Montenegro. In Slovenia, there is a regulated system of distribu­tion of tips, while in Montenegro this system is not clearly defined. Moreover, in Slovenia, there is also an orderly system for the collection and sharing of tips. Due to this fact, in Slovenia, the distribution of tips includes both, the employees who are directly involved in providing services as well as their colleagues. By contract, in Montenegro, only employees directly involved in providing services are entitled to a tip. Practical implications: In order to decrease labor costs, we propose that the management takes control of tipping and integrates tips into the reward system. Also, the employees should be made aware of how tipping improves service and increases their income. Limitations: The sample was formed by the questionnaire that was distrib­uted to various companies in the service sector as a non-probability method based on referrals from initial subjects to get another subject. The question­naire was sent by e-mail directly. The data were obtained by the Chamber of Commerce of Slovenia and the Chamber of Commerce of Montenegro. The main problem with small samples is the interpretation of results. Therefore, the results cannot be fully generalized. This issue should be addressed in fu­ture tipping studies.
... And while individual tips tend to be modest, the total can be substantial, with some workers earning over half of their income in tips (Payscale, 2012). In the US restaurant industry alone, it was recently estimated that over $46 billion is earned each year through tips (Azar, 2011). Further, historical trends suggest that tipping is becoming more economically meaningful: while the tipping norm was 10% in late 19th century America, it rose to 15% in the middle of the 20th, and by the end of the 20th century had reached 20% in large cities (Post, 1997). ...
Article
In early 2020, the novel coronavirus (COVID-19) spread to the United States and upended normal life. Using trip-level data on over 17 million taxi rides taken in Chicago from 2018–2021, I document how tipping behavior changed during the COVID-19 pandemic. I find that the average non-zero tip as a percent of the taxi fare increased 2 percentage points, or roughly 10%. Meanwhile, the likelihood that a passenger left a tip at all declined by roughly 5 percentage points, down from a pre-pandemic likelihood of 95%. My preferred specification suggests that the effect on the intensive margin dominates that in the extensive margin, leading to an aggregate increase in tipping generosity during the pandemic. I leverage granularity in the data to explore the mechanisms behind these trends and offer two explanations consistent with the data. First, passengers responded to the two economic shocks of the pandemic – unemployment and savings overhangs – by varying their tipping rates accordingly. Second, passengers internalized the increased risk of COVID-19 infection as an additional cost for taxi drivers and increased their tips as compensation. My analysis testifies to the sustainability of tipping in times of crises and offers theoretical insight into what drives tipping behavior.
... While repurchase intentions reflect future behavior, whether and if so, how much to tip is an immediate response to the treatment customers receive during a service encounter. Tipping behavior can reflect customers' compliance with existing social norms and their gratitude toward a service employee (Azar 2011;Lynn, Zinkhan, and Harris, 1993). Thus, when companies transition from fixed to dynamic prices, customers can perceive this as a violation of distributive fairness and their entitlement to a "normal" transaction. ...
Article
Full-text available
Dynamic pricing is typically implemented via pricing algorithms that react to varying levels of supply and demand. Some companies, such as Uber, also vary prices for different offers, such as standard cars or limousines for a ride. However, companies usually do not proceed to the next logical step and delegate pricing authority to their employees. This is astonishing as service employees often vary in service quality, possess unique business knowledge, hold close relationships with customers, and influence the overall customer experience. The authors investigate the consequences of delegating pricing authority to employees. They also investigate the responses of customers who face a situation where their firm transitions from fixed to dynamic prices set by the firm (control group) or service employees (treatment group). The findings demonstrate that the actual dynamic price paid affects customers’ distributive fairness perceptions, which influence their behavioral responses. The authors find support for pricing authority (firm vs. employee) acting as a second-stage moderator. The results provide supporting evidence for the stylized fact that firms keep the pricing authority with the company and do not delegate it to service employees instead.
Article
Tipping is a complex phenomenon with wide-ranging impacts on workers and organizations. Prior research has made important contributions to our understanding of why tipping happens and what its impacts are. Yet, we still have much to learn about these topics, particularly when it comes to the emergence, evolution, and diffusion of tipping norms, how organizations approach their decision-making about tipping practices, and the broader individual, organizational, and societal impacts of tipping. Despite management researchers’ limited attention to tipping to date, I argue that they have much to contribute to our understanding of these questions through their conceptual tools and lenses.
Article
Currently, businesses worldwide are expected to make long-term commitments aimed at climate change mitigation to achieve carbon-neutrality by 2050. However, before companies make long-term commitments, they may need incentives or institutional arrangements that encourage them to act. Previous studies have suggested that these incentives and institutional arrangements differ from those offered to encourage short- and mid-term activities. Japan has established a government-industry collaboration to mitigate climate change. This framework has proven to be organized and effective in undertaking climate action for the short- and medium-term; however, a more effective framework could be developed to promote a long-term strategy. This study surveyed 235 Japanese companies to examine effective institutional arrangements related to climate action. It demonstrated that the business sector aims to formulate institutional arrangements to ensure fairness and transparency in its climate change actions. Accordingly, norms, financial incentives, and accountability were identified as important factors. Furthermore, norms set by industry associations and international organizations influence the establishment of long-term commitments, unlike those set by third parties. Financial incentives were effective for encouraging long-term commitments and general mitigation activities, notably short- to mid-term activities. Information disclosure and verification by a third party had a positive effect on ensuring accountability in vision and quantitative target-setting for CO2 emission reduction. Long-term commitments are encouraged when such institutional arrangements serve as a self-regulating system for companies to establish and implement their vision. Key policy insights • The role of non-state actors has attracted attention for achieving climate-related goals. Thus, identifying a mechanism that incentivizes non-state actors, particularly in the business sector, is crucial. • Traditionally, government-guided frameworks have worked well in Japan. This study demonstrates the role of business associations, international organizations, and third parties in formulating institutional arrangements that promote a long-term commitment toward the 2050 vision. • Industry associations and international organizations serve as norm-setters, while third parties act as a verifying body, enforcing fairness and transparency. Thus, appropriate institutional arrangements could serve as a self-regulating system to encourage companies to achieve climate change-related actions.
Article
Although tipping is widely considered to be normative behavior, normative influences on tipping have been under studied. A hypothetical scenario experiment examined the effects on tipping of both descriptive and injunctive tipping norms as well as their interactions with one another and with tipping motives. Results support the normative nature of tipping – stronger injunctive tipping norms increased both the likelihood of tipping counterworkers and (at least sometimes) the size of tips given to them. However, local descriptive tipping norms had small if any main-effects on the tipping of counterworkers, probably because they decreased respondents’ perceptions that the worker deserved more tips, that their tips would be noticed, and that their tips would encourage others to tip at the same time that they increased respondents’ feelings of being pressured to tip. These and other findings in this study demonstrate the complex nature of normative influences on tipping as well as the need for more research on those influences.
Article
Occupational characteristics that predict the likelihood of an occupation receiving tips are shown here to also moderate the effects of individual differences in reciprocity, altruism and duty motives for tipping. For example, low occupational status enhances the effects of all three motives on tipping. These findings support the idea that occupational differences in the receipt of tips are attributable to occupational characteristics that enhance or undermine one or more of the motivations for tipping. The results also provide numerous new insights into the potential effects of occupational characteristics on tipping motives and can be used to make more informed guesses about the best ways to increase the tip incomes of workers in various service occupations.
Article
Purpose Consumers can provide monetary tips to service employees as a reward for their efforts. However, consumers’ ability to recognize the demands of these jobs could affect tipping behavior. This study aims to examine the difficulty consumers have recognized the emotional toll of service work, and how this affects tipping behavior. Design/methodology/approach Three experiments were conducted with US participants to determine how the focus on emotional burdens of service work affects willingness to tip lower level service employees. Findings Results reveal that when consumers hear about the emotional costs of service labor, they report less willingness to tip low-level workers, compared to when they learn about other job costs or contributions. Results further show that reducing power distance between customers and workers can increase willingness to tip when emotional costs are emphasized. Research limitations/implications This research contributes to the services literature by showing how feelings of power affect whether consumers appreciate certain job costs, and, in turn, their tipping behavior. Practical implications This research clarifies how consumers perceive job demands, which has direct consequences for tipping behavior and suggests more strategies to improve tips. Social implications Findings can help advocates looking to advance the status and compensation for lower-level service workers. Originality/value This research is first to explore why the emotional costs of service labor are not recognized in certain cases, and provides insight on how to improve customer treatment of lower-level service labor.
Article
Full-text available
Psychological research on tipping has found that servers earn larger tips when they introduce themselves by name, squat down next to the table, flash sincere smiles, touch their customers, use tip trays with credit-card insignia, write "thank you" on the backs of checks, and-for many servers-draw a happy face on the backs of checks. Most of those simple actions increased tips by 20 percent or more, although that effect is not expected to be cumulative. That is, combining actions that separately increase tips will probably not produce an even larger effect. Since the actions are innocuous and varied, every manager should be able to find several things to recommend to the wait staff, and every server should be able to find something he or she would be comfortable doing.
Article
Research indicates that the size of a tip is rarely correlated with the quality of the service rendered. These findings empirically refute the widely accepted economic argument that tipping is an efficient quality-control mechanism. This study provides an alternative explanation to the existence of tipping. It develops a microeconomics tipping model and demonstrates that tips affect the firm’s profitability through changes in the market’s demand-supply equilibrium when consumer segments differ in their demand functions and their propensity to tip. This demand-supply framework can serve as a useful tool for managers who wish to select an appropriate tipping policy for their firms.
Article
Conventional wisdom suggests that table servers can judge how well they're doing by the size of their tips. As it turns out, however, that may not be true.
Article
Tipping is an interesting economic behavior because it is an expense that consumers are free to avoid. Although called for by social norms, tips are not legally required. Furthermore, since tips are not given until after services have been rendered, they are not necessary to get good service in establishments that are infrequently patronized. For this reason, many economists regard tipping as mysterious or seemingly irrational behavior. The present chapter explores this behavior and its implications for economic theory and public policy. The chapter is divided into four sections. The first two sections provide more detail about the phenomenon of tipping by summarizing and discussing the results of empirical research on the determinants and predictors of restaurant tipping and of national differences in tipping customs respectively. Then, economic theories about tipping are reviewed in light of the previously summarized empirical literature. Finally, the public welfare and policy issues raised by tipping are discussed.
Article
Research on race differences in tipping suggests that (1) Blacks leave smaller average restaurant tips than doWhites, (2) Black-White differences in tipping persist after controlling for socio-economic status, (3) Blacks tip less than Whites even when provided comparable levels of service, (4) Blacks tip less than Whites even when the server is black, and (5) Blacks are less likely thanWhites to know that it is customary/ expected to tip 15 to 20% of the bill size in U.S. restaurants. The practical implications of these findings for restaurant managers, restaurant industry organizations, and restaurant chains are discussed. In general, those implications center on the need to educate Blacks about the 15 to 20% tipping norm.
Article
The connection between service quality and tip sizes is tenuous at best, as shown by an analysis of 14 studies (involving 2,645 dining parties at 21 different restaurants) that examined the relationship between service and tips. The meta-analysis of the studies sought to statistically combine 24 correlations between tipping and service. While the studies taken together found that, indeed, tips increased with the perceived quality of service, the relationship was weak enough to raise doubts about the use of tips to motivate servers, measure server performance, or identify dissatisfied customers.
Article
Tipping is a widespread custom in which service patrons give voluntary payments of money to the workers who have served them. This study found that tipping is more prevalent in countries the greater the value their citizens place on status/prestige. This finding suggests that tipping functions (in part) as a status display for consumers. Hospitality managers should keep this and other functions of tipping in mind when considering whether or not to permit tipping of their employees.
Article
This study of 105 dining parties at a casual chain restaurant found that a male server received significantly larger tips when he touched the shoulder of the person paying the bill than when he did not touch the customer. This touch effect on tips was essentially the same whether the touch was for two or four seconds, and whether the customer being touched was male or female. The age of the customer, however, did have a significant effect on the extent to which the touch increased the server's tips. Young customers responded more positively to the touch than did older diners. Nevertheless, the older diners who were touched did increase their tips compared to like-aged diners who weren't touched at all. Restaurant managers' personal objections to promoting touching seem to be misguided in light of these and other experimental data, and their fears of legal repercussions from touching customers are groundless.