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

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  • Ofer Azar

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.

Suggested Citation

  • Ofer Azar, 2009. "Incentives and service quality in the restaurant industry: the tipping-service puzzle," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1917-1927.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:15:p:1917-1927
    DOI: 10.1080/00036840601131813
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    1. 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.
    2. 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.
    3. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, John Wiley & Sons, vol. 71(1), pages 170-181, July.
    4. Ofer H. Azar & Yossi Tobol, 2008. "Tipping as a Strategic Investment in Service Quality: An Optimal‐Control Analysis of Repeated Interactions in the Service Industry," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 246-260, July.
    5. Ofer Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1871-1879.
    6. Bodvarsson, Orn B. & Gibson, William A., 1994. "Gratuities and customer appraisal of service: Evidence from Minesota restaurants," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 23(3), pages 287-302.
    7. Orn Bodvarsson & William Luksetich & Sherry McDermott, 2003. "Why do diners tip: rule-of-thumb or valuation of service?," Applied Economics, Taylor & Francis Journals, vol. 35(15), pages 1659-1665.
    8. 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.
    9. Azar, Ofer H., 2008. "The effect of external incentives on profits and firm-provided incentives strategy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(1), pages 149-156, February.
    10. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
    11. 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.
    12. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall.
    13. Ofer H. Azar, 2003. "The implications of tipping for economics and management," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 30(10), pages 1084-1094, October.
    14. Donna Brown & Steven McIntosh, 2003. "Job satisfaction in the low wage service sector," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1241-1254.
    15. Azar, Ofer H., 2007. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 250-265, April.
    16. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, John Wiley & Sons, vol. 71(1), pages 170-181, July.
    17. 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.
    18. George A. Akerlof & Rachel E. Kranton, 2000. "Economics and Identity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 715-753.
    19. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    20. Őrn Bodvarsson, 2005. "Restaurant tips and service quality: a reply to Lynn," Applied Economics Letters, Taylor & Francis Journals, vol. 12(6), pages 345-346.
    21. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-349, April.
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    23. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, August.
    24. Lynn, Michael & Zinkhan, George M & Harris, Judy, 1993. "Consumer Tipping: A Cross-Country Study," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 20(3), pages 478-488, December.
    25. John Anderson & Orn Bodvarsson, 2005. "Do higher tipped minimum wages boost server pay?," Applied Economics Letters, Taylor & Francis Journals, vol. 12(7), pages 391-393.
    26. Lynn, Michael & McCall, Michael, 2000. "Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 29(2), pages 203-214.
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    Citations

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    Cited by:

    1. Thrane, Christer & Haugom, Erik, 2020. "Peer effects on restaurant tipping in Norway: An experimental approach," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 244-252.
    2. Lynn, Michael & Wang, Shuo, 2013. "The indirect effects of tipping policies on patronage intentions through perceived expensiveness, fairness, and quality," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 62-71.
    3. Azar, Ofer H., 2011. "Business strategy and the social norm of tipping," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 515-525, June.
    4. Ofer H. Azar & Yossi Tobol, 2008. "Tipping as a Strategic Investment in Service Quality: An Optimal‐Control Analysis of Repeated Interactions in the Service Industry," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 246-260, July.
    5. Saunders, Stephen G. & Lynn, Michael, 2010. "Why tip? An empirical test of motivations for tipping car guards," Journal of Economic Psychology, Elsevier, vol. 31(1), pages 106-113, February.
    6. Lynn, Michael & Jabbour, Patrick & Kim, Woo Gon, 2012. "Who uses tips as a reward for service and when? An examination of potential moderators of the service–tipping relationship," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 90-103.
    7. Conlisk, Sarah, 2021. "Tipping in Crises: Evidence from Chicago Taxi Passengers during COVID-19," OSF Preprints brvhp, Center for Open Science.
    8. Sanjay Jain & Kun Qian, 2021. "Compensating Online Content Producers: A Theoretical Analysis," Management Science, INFORMS, vol. 67(11), pages 7075-7090, November.
    9. Mohammad Anisur Rahman & Xu Qi & Abu Naser Mohammad Saif & Ismail Bin Ibrahim & Rabeya Sultana, 2017. "Assessing service quality of online bill payment system using extended SERVQUAL model (SERVQUAL-Butterfly model): A case study of Dhaka electric supply company limited (DESCO), Bangladesh," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1301195-130, January.
    10. Ofer H. Azar, 2020. "The Economics of Tipping," Journal of Economic Perspectives, American Economic Association, vol. 34(2), pages 215-236, Spring.
    11. Michal Kvasnička, 2018. "What Motivates Restaurant Customers to Tip: Evidence from the Czech Republic," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 66(1), pages 273-282.
    12. Lee, Jeonggyu & Aggarwal, Anubhav & Rafieian, Hoori & Korschun, Daniel, 2020. "Do consumers use tipping to monitor service? Role of power and embarrassment," Journal of Retailing and Consumer Services, Elsevier, vol. 56(C).
    13. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany.

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    JEL classification:

    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • D10 - Microeconomics - - Household Behavior - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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