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

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  • Ofer H. Azar

    (Ben-Gurion University of the Negev)

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.

Suggested Citation

  • Ofer H. Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Others 0503013, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpot:0503013
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    References listed on IDEAS

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    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    3. 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.
    4. 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.
    5. 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.
    6. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, Southern Economic Association, vol. 71(1), pages 170-181, July.
    7. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    8. 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.
    9. Ofer Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1871-1879.
    10. 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 728-741, September.
    11. 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.
    12. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-349, April.
    13. Ruffle, Bradley J., 1999. "Gift giving with emotions," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 399-420, July.
    14. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall.
    15. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, University Library of Munich, Germany.
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    Cited by:

    1. Holland, Steven J., 2009. "Tipping as risk sharing," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 641-647, August.
    2. 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.
    3. Lynn, Michael, 2016. "Why are we more likely to tip some service occupations than others? Theory, evidence, and implications," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 134-150.
    4. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
    5. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    6. 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.
    7. 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.
    8. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany.

    More about this item

    Keywords

    Tipping; Social norms; Social welfare; Behavioral economics; Psychology and economics; psychological economics;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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