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Incentives and Service Quality in the Restaurant Industry: The Tipping – Service Puzzle

  • Azar, Ofer H.

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://mpra.ub.uni-muenchen.de/4457/1/MPRA_paper_4457.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4457.

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Date of creation: 2005
Date of revision: 2006
Handle: RePEc:pra:mprapa:4457
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  1. Loewenstein, George, 1999. "Because It Is There: The Challenge of Mountaineering . . . for Utility Theory," Kyklos, Wiley Blackwell, vol. 52(3), pages 315-43.
  2. 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.
  3. Ofer H. Azar, 2003. "What sustains social norms and how they evolve? The case of tipping," Others 0309001, EconWPA.
  4. 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.
  5. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
  6. Ofer H. Azar, 2003. "Optimal Monitoring with External Incentives: The Case of Tipping," Industrial Organization 0312004, EconWPA.
  7. 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, Southern Economic Association, vol. 75(1), pages 246-260, July.
  8. 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.
  9. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA.
  10. 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.
  11. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  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, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Others 0503013, EconWPA.
  14. Ofer H. Azar, 2005. "Who Do We Tip and Why? An Empirical Investigation," Labor and Demography 0502005, EconWPA.
  15. 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.
  16. 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.
  17. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-49, April.
  18. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, EconWPA.
  19. Lynn, Michael & Zinkhan, George M & Harris, Judy, 1993. " Consumer Tipping: A Cross-Country Study," Journal of Consumer Research, University of Chicago Press, vol. 20(3), pages 478-88, December.
  20. 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.
  21. 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.
  22. 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.
  23. Őrn Bodvarsson, 2005. "Restaurant tips and service quality: a reply to Lynn," Applied Economics Letters, Taylor & Francis Journals, vol. 12(6), pages 345-346.
  24. Donna Brown & Steven McIntosh, 2003. "Job satisfaction in the low wage service sector," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1241-1254.
  25. 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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