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The Social Norm of Tipping: Does it Improve Social Welfare?

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Author Info
Ofer H. Azar (Ben-Gurion University of the Negev)

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Abstract

Some economists believe that social norms are created to improve welfare where the market fails. I show that tipping is such a norm, using a model in which a waiter chooses service quality and then a customer chooses the tip. The customer’s utility depends on the social norm about tipping and feelings such as embarrassment and fairness. The equilibrium depends on the exact social norm: higher sensitivity of tips to service quality (according to the norm) yields higher service quality and social welfare. Surprisingly, high tips for low quality may also increase service quality and social welfare.

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Paper provided by EconWPA in its series Others with number 0503013.

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Length: 40 pages
Date of creation: 29 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpot:0503013

Note: Type of Document - pdf; pages: 40
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Web page: http://129.3.20.41

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Related research
Keywords: Tipping; Social norms; Social welfare; Behavioral economics; Psychology and economics; psychological economics;

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Find related papers by JEL classification:
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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References listed on IDEAS
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. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers iewwp040, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. 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)
  3. Ofer H. Azar, 2003. "Optimal Monitoring with External Incentives: The Case of Tipping," Industrial Organization 0312004, EconWPA. [Downloadable!]
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  4. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, EconWPA. [Downloadable!]
  5. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Oxford University Press, vol. 35(2), pages 334-49, April.
  6. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May. [Downloadable!] (restricted)
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  7. 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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  8. Ruffle, Bradley J., 1999. "Gift giving with emotions," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 399-420, July. [Downloadable!] (restricted)
  9. Fehr, Ernst & Falk, Armin, 2002. "Psychological Foundations of Incentives," IZA Discussion Papers 507, Institute for the Study of Labor (IZA). [Downloadable!]
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  10. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall. [Downloadable!] (restricted)
  11. 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)
  12. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September. [Downloadable!] (restricted)
  13. 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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  14. 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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  15. 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. Ofer Azar, 2008. "Strategic Behavior and Social Norms in Tipped Service Industries," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1), pages 1778-1778. [Downloadable!] (restricted)
  2. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA. [Downloadable!]
  3. Ofer H. Azar, 2005. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Microeconomics 0503005, EconWPA. [Downloadable!]
    Other versions:
  4. Azar, Ofer H., 2005. "Incentives and Service Quality in the Restaurant Industry: The Tipping – Service Puzzle," MPRA Paper 4457, University Library of Munich, Germany, revised 2006. [Downloadable!]
    Other versions:
  5. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany. [Downloadable!]
  6. 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!]
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