Tipping: The Economics of a Social Norm

Tipping illustrates the importance of social norms in motivating economic behavior. People tip because this is the social norm and disobeying norms results in social disapproval that creates emotional disutility. Tipping is also economically important: in the United States alone, millions of workers derive most of their income from tips, and annual tips amount to dozens of billions of dollars. I claim that tipping is not a single phenomenon; the economics of some tipping occasions is very different from that of others. I divide tipping to six different categories: reward-tipping, price-tipping, tipping-in advance, bribery-tipping, holiday-tipping and gift-tipping, and discuss the economics of each category. The analysis suggests that in many cases the social norm of tipping has economic justification, because it solves some inefficiency and increases welfare. In particular, tipping can promote good service where other mechanisms fail to do so. This suggests that the relationship between economics and social norms is indeed complex; not only social norms motivate economic behavior, but also economic reasons may promote the establishment of certain social norms, as Arrow (1971) argued.