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Incentives and service quality in the restaurant industry: the tipping-service puzzle

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Author Info
Ofer Azar

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Abstract

Tipping is a significant economic activity (tips in the US food industry alone amount to about $42 billion annually) that was claimed to improve service quality and increase economic efficiency, because it gives incentives to provide excellent service, and therefore allows to avoid costly monitoring of workers. The article suggests that this common wisdom might be wrong. A simple model shows formally that tips can improve service only if they are sensitive enough to service quality. Empirical evidence suggests that tips are hardly affected by service quality. Nevertheless, rankings of service quality by customers are very high; the co-existence of these two findings is denoted 'the tipping-service puzzle,' and several possible explanations for it are offered.

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File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/00036840601131813&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 41 (2009)
Issue (Month): 15 ()
Pages: 1917-1927
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Handle: RePEc:taf:applec:v:41:y:2009:i:15:p:1917-1927

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lynn, Michael & Grassman, Andrea, 1990. "Restaurant tipping: an examination of three 'rational' explanations," Journal of Economic Psychology, Elsevier, vol. 11(2), pages 169-181, June. [Downloadable!] (restricted)
  2. Ofer H. Azar, 2003. "Optimal Monitoring with External Incentives: The Case of Tipping," Industrial Organization 0312004, EconWPA. [Downloadable!]
    Other versions:
  3. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, EconWPA. [Downloadable!]
  4. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Oxford University Press, vol. 35(2), pages 334-49, April.
  5. Azar, Ofer H. & Tobol, Yossi, 2006. "Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry," MPRA Paper 4393, University Library of Munich, Germany, revised 2007. [Downloadable!]
    Other versions:
  6. Ofer H. Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor and Francis Journals, vol. 37(16), pages 1871-1879, September. [Downloadable!] (restricted)
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  7. Loewenstein, George, 1999. "Because It Is There: The Challenge of Mountaineering . . . for Utility Theory," Kyklos, Blackwell Publishing, vol. 52(3), pages 315-43.
  8. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall. [Downloadable!] (restricted)
  9. John E. Anderson & Örn B. Bodvarsson, 2005. "Do higher tipped minimum wages boost server pay?," Applied Economics Letters, Taylor and Francis Journals, vol. 12(7), pages 391-393, June. [Downloadable!] (restricted)
  10. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA. [Downloadable!]
  11. Ofer H. Azar, 2007. "Do people tip strategically, to improve future service? Theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 515-527, May. [Downloadable!] (restricted)
  12. Lynn, Michael & McCall, Michael, 2000. "Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship," The Journal of Socio-Economics, Elsevier, vol. 29(2), pages 203-214. [Downloadable!] (restricted)
  13. Bodvarsson, Orn B. & Gibson, William A., 1994. "Gratuities and customer appraisal of service: Evidence from Minesota restaurants," The Journal of Socio-Economics, Elsevier, vol. 23(3), pages 287-302. [Downloadable!] (restricted)
  14. Donna Brown & Steven McIntosh, 2003. "Job satisfaction in the low wage service sector," Applied Economics, Taylor and Francis Journals, vol. 35(10), pages 1241-1254, January. [Downloadable!] (restricted)
  15. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, 08. [Downloadable!] (restricted)
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  16. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August. [Downloadable!] (restricted)
  17. Azar, Ofer H., 2003. "The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy," MPRA Paper 4456, University Library of Munich, Germany, revised 2007. [Downloadable!]
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  18. Conlin, Michael & Lynn, Michael & O'Donoghue, Ted, 2003. "The norm of restaurant tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 297-321, November. [Downloadable!] (restricted)
  19. Ofer H. Azar, 2005. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Microeconomics 0503005, EconWPA. [Downloadable!]
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  20. Lynn, Michael & Zinkhan, George M & Harris, Judy, 1993. " Consumer Tipping: A Cross-Country Study," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 20(3), pages 478-88, December.
  21. Azar, Ofer H., 2004. "What sustains social norms and how they evolve?: The case of tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 49-64, May. [Downloadable!] (restricted)
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  22. Örn B. Bodvarsson & William A. Luksetich & Sherry McDermott, 2003. "Why do diners tip: rule-of-thumb or valuation of service?," Applied Economics, Taylor and Francis Journals, vol. 35(15), pages 1659-1665, October. [Downloadable!] (restricted)
  23. Ruffle, Bradley J., 1998. "More Is Better, But Fair Is Fair: Tipping in Dictator and Ultimatum Games," Games and Economic Behavior, Elsevier, vol. 23(2), pages 247-265, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany. [Downloadable!]
  2. Azar, Ofer H. & Tobol, Yossi, 2006. "Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry," MPRA Paper 4393, University Library of Munich, Germany, revised 2007. [Downloadable!]
    Other versions:
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