Why we tip

"We" being Americans (and any other culture with tipping).

At Marginal Revolution, Tyler Cowen discusses tipping.

The best way to understand tipping is to go to a restaurant you will never patronize again. Once your meal is over, when she is not looking, leave your tip not on your table but rather on another table she served. That way she still gets her money and you have in no way ripped her off.

That is psychologically tough to do. You fear the waitress will think you are a lout and a deadbeat. Of course in no-tipping countries, or for that matter non-tipping sectors, this dilemma does not arise.

The real question is why America is structured so that waiters and waitresses can sell feel-good services ("you are a generous tipper and a fine man") to strangers, in return for money.

Tipping could have evolved gradually. To begin with, many customers may have wanted to give something extra, and the servers had no objections. Initially, this tip may have been above and beyond what was expected. Restaurant owners may have encouraged it, meanwhile offering the possibility of tips to potential employees as a fair exchange for a lower wage. If tipping happened to become common enough, it may have become expected, a positive reaction to the tipper being replaced gradually by a negative reaction to the non-tipper. This may have caused customers to feel pressured to tip, and then this may have snowballed. An element of voluntariness remains, but it is dominated by a strong sense of expectation (e.g. a fear of being thought a deadbeat).

The institution of tipping in effect divides one service provider into (almost) two. The customer almost pays separately for two services rather than for one (to be more precise, he separately pays for a portion of server's income). This economic separation effectively makes the server into a semi-independent business entity who has, to an incomplete but substantial degree, both the freedom and the responsibility to decide what to do to ensure a revenue stream, much as any independent business entity would. This, to an incomplete but substantial degree, frees the restaurant owner to focus on the remainder of the business.

We could, however, ask why the tip is treated even now as a voluntary (if strongly expected) payment. This may be to deal with an information asymmetry. The customer knows nothing about the server initially but knows everything he needs to know at the end of the meal. A treatment of tipping as mandatory may be prevented from developing by a reluctance on the part of customers to obligate themselves to pay for an unknown quantity. Additionally, a separate but still mandatory server fee does not have much meaning if the customer is not able to choose his server, and in most cases he is not (though the causality may go both ways here: since tipping is voluntary then there is less dependence on competition between servers and so less pressure to allow the customer to choose his server). Therefore, if the economic division between restaurant and server is to arise, it may need to be through a treatment of tipping as voluntary rather than mandatory.

The practice of treating the tip as voluntary if strongly expected may be the element that is most constrained by culture, because it depends on the degree to which customers' behavior can be influenced by strong expectation. It may be that Americans are especially responsive to the fear that they may be thought a lout and a deadbeat by a server. This willingness to pay someone we may never see again in order that they not think ill of us might arguably be classified as an irrational element of the American character - i.e., we're suckers. However, in the setting of the restaurant this arguable irrationality leads to an economically defensible outcome, because the server is still being paid for his service and is not being overpaid (the market ensures this). The customer really is a sucker, but because the market compensates for tips by reducing the cost of his meal, he's really not being ripped off.

Tyler Cowen concludes:

I view tipping as correlated with effective fundraising in other areas, and Americans as being especially willing to set this additional fundraising arena in motion.

I'm not sure what he's getting at, though a comparison with (other) fundrasing sounds intriguing.

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There is a co-ordination

There is a co-ordination problem here too. The worry about being seen as a deadbeat and a lout comes from the pre-existing culture-specific expectation that a tip is appropriate. Here in Ireland it's routine to tip at restaurants (10% - 15%) and (increasingly) for waitress but not bartending service at bars. I'd say that most people would prefer not to tip - it's not so much a charge for the "feel-good" associated with tipping but a levy to avoid the "feel-bad" generated by the fact that other people tip - and if a no-tipping policy could be enforced, this would be an improvement.

signalling mechanism

As I said in the comments over there:

I’ve seen a few personal ads from women saying that they kind of guy they’re looking for is a good-tipper. Thus, I suggest that tipping serves partially as a signaling mechanism, indicating that a spousal candidate would be generous with his financial resources.

It would be interesting to see if women’s preferences for their companion’s tipping change over time. Before marriage, generous tipping is a signal that the man will be generous with the spouse. After marriage, it’s (a) money that could be “better” spent on the wife; (b) potentially flirtatious behavior between the man and a younger woman.

You might have this

You might have this backwards: given the prior cultural expectation of tipping, a person who "welshes" on tipping is signalling something negative to a potential mate. Absent that cultural expectation, extravagant tipping doesn't seem to spontaneously arise as a signalling mechanism.

Cowen, not Cohen.

His name is Cowen, not Cohen.

Thanks - fixed

Thank you. I've fixed the spelling.

Repeat Business is Important

This willingness to pay someone we may never see again in order that they not think ill of us might arguably be classified as an irrational element of the American character - i.e., we're suckers.

Just a quibble with this: if you're at all like me, you have a core set of restaurants you frequent most often, with a new restaurant being the exception not the rule. If I stiffed a waitress at one of these restaurants I would hesitate to go back there, fearing a dirty look or bad service in retaliation.

The repetitive nature of business is often cited as a force for making a business serve the customer, even at additional cost, but here it's something that keeps the customer in line. Of course it's true that in many cases we can reasonably expect never to see the waitress again (e.g. while traveling). But even if that sense of emotional obligation to tip developed mostly out of repeat interactions, it's hard to turn off the emotion in the odd instance where you can get away with it.

Good point

I agree, and that does significantly impact the story, and I have not taken it into account above. However, it is still also true that we (well, many of us) tip even when we know we will not be going back. Your explanation (that we have trouble turning off the emotion developed through repeat interactions) may be right.