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

  • Ofer H. Azar

    (Ben-Gurion University of the Negev)

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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File URL: http://econwpa.repec.org/eps/othr/papers/0503/0503013.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Falk, Armin & Fehr, Ernst, 2002. "Psychological Foundations of Incentives," CEPR Discussion Papers 3185, C.E.P.R. Discussion Papers.
  2. Ofer H. Azar, 2003. "What sustains social norms and how they evolve? The case of tipping," Others 0309001, EconWPA.
  3. 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.
  4. Ernst Fehr & Simon G�chter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
  5. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, EconWPA.
  6. Georg Kirchsteiger & Martin Dufwenberg, 2004. "A theory of sequential reciprocity," ULB Institutional Repository 2013/5899, ULB -- Universite Libre de Bruxelles.
  7. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-49, April.
  8. 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.
  9. 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.
  10. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall.
  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.
  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.
  13. Ofer H. Azar, 2005. "Who Do We Tip and Why? An Empirical Investigation," Labor and Demography 0502005, EconWPA.
  14. Ruffle, Bradley J., 1999. "Gift giving with emotions," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 399-420, July.
  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.
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