DAVID FRANK started working for tips when he was 11 years old, delighting restaurant diners in New York with his magic tricks. As a teenager he would make an average of $60-70 in an evening—not bad, but he wanted more. So he started reading research on tipping, and found a study showing that servers who left a sweet at the end of the meal could up their pay. He tried handing punters a playing card at the end of his act, hoping that the memento would persuade them to part with more cash. It worked.
Mr Frank’s findings confirmed the notion of the tip as a sort of reward for outstanding service. That may sound straightforward, but a follow-up study with Michael Lynn of Cornell University, where Mr Frank now happens to be a student, found an opportunity for some sleight of hand. They discovered that performing a magic trick at a table also increased the tips for the waiters and waitresses serving there, even though they had done absolutely nothing more than usual. Though tipping may seem like a simple economic trans action, by incentivising people to perform extra well, it turns out to be anything but.
For a start, economists are puzzled by the fact that so many people give tips, voluntarily handing out cash for a routine service, when it is assumed that customers generally want to pay as little as possible for what they buy. But fuzzier factors also seem to matter, like the feelings of gratitude that Mr Frank inspired. A survey in 2010 by Ofer Azar of Israel’s Ben-Gurion University of the Negev found that 85% of American tippers claimed to be following a social norm, while 60% said they tipped to avoid guilt (see chart 1).
During the pandemic these fuzzy factors appear to have intensified. Mr Lynn observed that people have been tipping more generously even while ordering take away food, while Sarah Conlisk of the Federal Reserve Board has found that people travelling in richer areas have been tipping their taxi drivers more than before. This, it is reckoned, was in effect doling out danger money, as tipping rates rose along with covid-19 hospitalisation rates; in Trump-voting areas they rose less fast, as perceptions of risk may have been lower.
The presence of a pandemic or of a magician performing at one’s table are just two of an array of factors that may affect the size of a tip. A tipper may simply be touched by the server. If a waiter squats down beside you at the table as he or she takes your order, that often elicits a higher tip. Good weather may spur generosity too. Race can be an uglier factor. A study of tips for cab drivers found that black drivers were tipped on average at a rate of 13%, while white drivers got 20%. Another study found that female Uber drivers were tipped 10-12% more than male ones, but not if they were over 65 (see chart 2).
Tipping habits vary vastly across the world. In America, where tips added to restaurant meals are around 20% of the tab, some suspect that a history of racial inequality has bolstered the practice. In 1902 John Speed, a journalist, wrote: “Negroes take tips, of course; one expects that of them—it is a token of their inferiority. But to give money to a white man was embarrassing to me.”
In many European countries a service charge is included in the bill and customers are not expected to pay much extra but they often round the figure up, leaving a few coins or a modest note on the table, amounting to an extra percentage or two. In some Asian countries, tipping is positively frowned upon. In Japan, for instance, it is viewed as an insulting insinuation that the recipient is akin to a beggar desperate for a handout. A similar attitude prevails in South Korea. In Hong Kong restaurant tips are generally not expected.
In India and Africa, where the gap between the prosperous middle class and the poor is often huge, tips are most certainly expected. Some academics have tried to see whether a stronger tipping culture correlates to measurable psychological traits in different cultural settings. One study across 30 countries suggested that tipping was more common in societies where inequality was rife and where the guilty feelings of the well-off are more acute. In some settings the onus is plainly on the customers to be more generous, thanks to an online ratings system whereby they are judged by the server. For instance in Doha, the Qatari capital, users of ride-hailing apps fear that without providing a cash tip their customer rating will fall, making it harder for them to catch a cab in future.
The most obvious economic justification for tipping is that it encourages the server to perform better. But the logic of the tip as an incentive is far from solid. Most customers in restaurants are not regulars. A one-time customer will not benefit in future by leaving a tip at the end of a meal. But even repeat customers do not seem to use tip rates to reward or to punish the server. Mr Azar says that if they did, their tips would more closely rise or fall according to the quality of service than with more casual diners. But he could find no such evidence. More strikingly, service quality in countries such as Japan and South Korea, where tipping is exceedingly rare, is not noticeably inferior to service in America or Europe.
If tips operated as incentives, one might expect them to be more common in professions where the customer repeatedly interacts with the provider. But that does not seem to be the case either, since a wealth of professions, such as dental hygienists, car mechanics or vets, entirely lack a culture of tipping. In Mr Azar’s survey, only 14% of Americans said they tipped to avoid poor service in future.
One study finds that quality of service explains a variation of no more than 5% in the size of the tip. In a study of rides using Uber, where only 15% of trips are tipped, the passenger’s characteristics proved three times more relevant than those of the driver when explaining the size of the tip.
A boss’s scam?
Tipping quite often benefits the restaurateur or business as much as—sometimes even more than—the recipient of the tip. Having enticed a customer with low up-front prices, a tip is then extracted later—and sometimes doesn’t even go entirely to the supposed recipient. Recently online platforms like Twitter, Facebook and YouTube have sought to keep the best talent on their own platforms by letting their star “creators” accept tips, with the company sometimes keeping a slice for itself. Order a coffee or a bagel to take away in Washington or New York, and nowadays the server is quite likely to swivel their tablet around, asking on-screen if you would like to leave a tip. Many find it awkward to refuse.
Tipping also passes a chunk of risk from managers to servers, especially when between 20% and 60% of a waiter’s income may be in tips, as is often the case in America. If business is booming, both management and the servers benefit, because tips are more plentiful. When business is slack, servers’ incomes fall along with overall revenue. The degree of risk-sharing varies by country. In Britain and Germany, for example, tips do not count towards the minimum wage. But in France and parts of America that have a “tipped minimum wage”, employees in effect lose the first tips they earn to their employer, who can count them as part of the minimum. Another argument in favour of tipping is that customers are better at observing the quality of service than managers are, so they know who should get an extra reward.
Tipping is also a way to avoid tax—to the benefit of both bosses and servers. In Britain the standard “optional” service charge escapes the 20% value-added tax applied to the rest of the meal. Tips in cash are pretty easy to hide from the taxman. In 2018 America’s Internal Revenue Service estimated that around 10% of personal income-tax underreporting was because employees did not report income in tips, though this has become harder as tips are more often put onto credit cards.
So who really benefits? Perception often matters more than reality. As long as servers think their tips will dip if their performance is poor, the management will reckon they have the desired effect. A survey of 1,189 servers found that half said that the quality of their service had a large or very large effect on the size of their tips. Attempts to replace tipping with other ways of pricing can worsen customer ratings. This happened after Carnival Cruise Line, based in Florida, scrapped tipping on their voyages in the early 2000s in favour of a service charge. A study by Mr Lynn and Zachary Brewster of Wayne State University found the same effect in restaurants, particularly in cheaper establishments. They suggested that better wages or better training were more likely to improve service, especially in fancier restaurants.
Hard to crack
Not that the practice is universally loved. In effect, tipping reserves 20% of a restaurant’s revenue for servers who interact with customers. This can frustrate posh restaurateurs in places like Washington and New York, where it is illegal for tips to be shared with kitchen staff, thereby diverting rewards away from them. In 2015 Danny Meyer, chief executive of Union Square Hospitality Group, tried to ditch tipping in his restaurants on these grounds. But after a painful increase in staff turnover, he decided to bring back tipping. Without it he reckoned he could not set attractive prices and keep competitive wages for his waiters. He struggled to manage a system whereby customers felt obliged to say “thank you” merely by voice—but not with their wallets.
Critics say tipping is an unfair practice that leaves workers fawning for favours, confuses customers about the real price they can expect to pay, and encourages tax evasion. Its champions say it is an efficient way to align incentives between bosses and workers, and a healthy way for the customer to express gratitude.
For all its drawbacks, Americans are keenest to retain the practice: in a survey 60% of them said they preferred tipping to a modest service charge. Customers may not be right that tipping improves service. Perhaps they like to feel, as they step out for a meal, that they are in control. And it may comfort servers to think, however erroneously, that if they perform better they will be more handsomely rewarded. ■