A Rational Case Against the Irrationality of Tipping

[We are pleased to welcome Greg, who most recently wrote on Rationally Speaking about dietary pet views, among our staff contributors. Welcome aboard, Greg!]

by Greg Linster

http://gprs.olhblogspace.com/

At many restaurants in the United States you are served by a waiter or waitress who is paid a dismally low wage, usually one that is so low that the server wouldn’t do their job without the possibility of tips. Whatever the reason, consumers generally tend to find this situation palatable and participate in this bizarre cultural custom called tipping, where the diner leaves a tip in the 10-25 percent range based on the perceived quality of the service.

In microeconomics one of the assumptions (insert your favorite economist joke here) is that agents are rational, i.e, amongst other things, agents are utility maximizers. If real people actually behaved this way, though, they wouldn’t leave tips. Here’s why: when the check arrives the service has already been performed and either the diner gets to keep their money or they can give it to the server. What would the rational agent do? Certainly she wouldn’t just give money away that she could keep for herself — after-all, money provides a store of value and she’s a utility maximizer!

Some people object to this claim on legal grounds. While one certainly has a legal obligation to pay the bill, there is, however, no such legal requirement to leave a tip. Gauche as it might be, it’s not illegal to pay your bill at a restaurant and then leave without tipping. Therefore, economic theory tells us that a rational agent shouldn’t leave a tip at a restaurant, yet I’ll venture a guess that most people actually leave quite generous tips. How can this be?

First of all, I suspect that some rational people still tip because they feel compelled to by the non-financial benefits that come with following social norms. A failure to tip could cause one to be deemed as cheap or stingy by family, friends, or colleagues. Another reason might be because the diner frequents a restaurant often and wants good service the next time they come back. I think many people simply value these types of non-financial benefits more than they do the financial cost of the tip.

So that may explain why some people tip, but it’s still not a sufficient explanation. Here’s a little thought experiment: let’s suppose you were on a business trip in a place you’ll likely never visit again, say, Fargo, ND. Furthermore, let’s suppose you have just finished a meal at a restaurant by yourself and have just paid the bill. Here, then, is the question: would you leave a tip with no social capital at stake? If you would still leave a tip in this situation then you might not be as rational as economic theory portrays you.

Essentially, I think the cultural practice of tipping allows restaurant owners to unfairly transfer risk to the servers. In other words, a stingy, but legally compliant customer can harm the servers’ bottom line, but not the restaurants’. Additionally, there is a lot of cultural ambiguity when it comes to situations in which we are supposed to tip (including situations outside of restaurants). Foreign diners, for example, may be unaware that they are supposed to tip in the United States. What I want to argue is that both consumers and servers would benefit from abolishing the cultural practice of tipping. Abolishing tipping will help servers be exposed to less risk and it would alleviate much of the confusion about situations that do and don’t warrant tips.

For the sake of making this a dialectical argument, let’s examine some of the reasons why the cultural practice of tipping might be a positive thing. First off, servers may claim (in fact I’ve heard some friends say this) that while some customers may stiff them, others may tip very graciously. If that’s the case, I think we need to figure out the net effect. Also, it’s often believed that servers wouldn’t perform their services if there were no possibility to make a tip, but that can’t possibly be true. Many service personnel (e.g., grocery baggers and auto mechanics) adequately fulfill their duties without the presence of a tip, so I’m quite perplexed by this argument.

In line with that last point, I’ve become increasingly interested in the following question: why is there a cultural norm to tip servers at restaurants, bellhops, and taxi drivers, but not clerks at the grocery? How do these norms develop in the first place? Strangely, when I visit the grocery store my groceries usually get bagged quite well. And my car mechanic, who arguably has a much more important job in terms of protecting my safety than does a server at a restaurant, does not accept tips. He does his job astoundingly well too.

I think the explanation for this problem is rather simple, the true cost of the service, in this case bagging groceries or car maintenance, is actually reflected in the explicit price, which I conveniently know upfront. If the wages for these professions weren’t fair, people wouldn’t do the work. Shouldn’t the same thing be true of servers in a restaurant?

Let’s say that restaurant owners raised their prices by 20 percent and paid their servers appropriately according to the market signals. Servers would, then, be paid a wage that reflects the true cost of their service and skills, just like grocery baggers and auto mechanics. The restaurant owner would simply reflect this additional cost in the menu prices. The $10 meal would now cost $12.

While it’s unlikely that the irrational practice of tipping will become antiquated any time soon, I hope that I’ve demonstrated that it is, at least theoretically, problematic and that the arguments for keeping it are rather weak. Irrational as it may be, I will continue to tip quite generously until something does change.