International
Microeconomics
The point of tipping
Does it make for better service? The evidence is mixed—and attitudes vary
widely across the world
D avid 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  $60­70  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 memen­
to would persuade them to part with more
cash. It worked.
Mr Frank’s findings confirmed the no­
tion of the tip as a sort of reward for out­
standing service. That may sound straight­
forward,  but  a  follow­up  study  with  Mi­
chael 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
012
The presence of a pandemic or of a ma­
extra well, it turns out to be anything but. 
For  a  start,  economists  are  puzzled  by
the fact that so many people give tips, vo­
luntarily  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  grati­
tude  that  Mr  Frank  inspired.  A  survey  in
2010  by  Ofer  Azar  of  Israel’s  Ben­Gurion
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 on next page).
During  the  pandemic  these  fuzzy  fac­
tors  appear  to  have  intensified.  Mr  Lynn
observed  that  people  have  been  tipping
more generously even while ordering take­
away food, while Sarah Conlisk of the Fed­
eral  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 effect doling out dan­
ger money, as tipping rates rose along with
covid­19  hospitalisation  rates;  in  Trump­
voting areas they rose less fast, as percep­
tions of risk may have been lower.
The Economist January 15th 2022 59
gician  performing  at  one’s  table  are  just
two  of  an  array  of  factors  that  may  affect
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 stu­
dy found  that  female  Uber  drivers  were
tipped  10­12%  more  than  male  ones,  but
not if they were over 65.
Tipping  habits  vary  vastly  across  the
world. In America, where tips added to res­
taurant  meals  are  around  20%  of  the  tab,
some  suspect  that  a  history  of  racial  in­
equality 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 embar­
rassing to me.” 
In  many  European  countries  a  service
charge is included in the bill and custom­
ers are not expected to pay much extra but
they  often  round  the  figure  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  posi­
tively  frowned  upon.  In  Japan,  for  in­
stance, it is viewed as an insulting insinua­
tion  that  the  recipient  is  akin  to  a  beggar
desperate for a handout. A similar attitude
prevails in South Korea. In Hong Kong res­
 60 International
taurant tips are generally not expected.
In  India  and  Africa,  where  the  gap  be­
tween 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 cor­
relates  to  measurable  psychological  traits
in  different  cultural  settings.  One  study
across 30 countries suggested that tipping
was more common in societies where in­
equality was rife and where the guilty feel­
ings of the well­off are more acute. In some
settings the onus is plainly on the custom­
ers to be more generous, thanks to an on­
line  ratings  system  whereby  they  are
judged by the server. For instance in Doha,
the  Qatari  capital,  users  of  ride­hailing
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  justifica­
tion  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 reg­
ulars. A one­time customer will not benefit
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 ac­
cording to the quality of service than with
more  casual  diners.  But  he  could  find  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 profes­
sions where the customer repeatedly inter­
acts  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 finds 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.  0.08
A boss’s scam?
Tipping quite often benefits the restaura­
teur  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 You­
Tube have sought to keep the best talent on
their  own  platforms  by  letting  their  star
“creators”  accept  tips,  with  the  company
012
Why tip?
Reasons given for largesse, % responding*
United States Israel
0 20
It’s a social norm
Show gratitude
Waiters depend on tips
Avoid feeling guilty
Avoid embarrassment
Get poor future
service if no tip
Waiter may yell
at me if no tip
Source: Ofer Azer, Ben-Gurion
University, 2010
sometimes keeping a slice for itself. Order
a coffee or a bagel to take away in Washing­
ton or New York, and nowadays the server
is quite likely to swivel their tablet around,
asking on­screen if you would like to leave
a tip. Many find 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 Amer­
ica. If business is booming, both manage­
ment and the servers benefit, because tips
are more plentiful. When business is slack,
servers’ incomes fall along with overall
revenue. The degree of risk­sharing varies
by country. In Britain and Germany, for ex­
ample, tips do not count towards the mini­
mum wage. But in France and parts of
America that have a “tipped minimum
wage”, employees in effect lose the first
tips they earn to their employer, who can
count them as part of the minimum. An­
other argument in favour of tipping is that
customers are better at observing the qual­
ity of service than managers are, so they
know who should get an extra reward.
Tipping is also a way to avoid tax—to
the benefit of both bosses and servers. In
Britain the standard “optional” service
Ride and prejudice
Change in expected tip* for Uber drivers
2017, by age of driver and sex, $
Female driver, male passenger
Male driver, male passenger
Female driver, female passenger
Male driver, female passenger
21-25 26-34 35-44 45-54 55-64
*Compared with male driver aged 21-25 with male passenger;
includes passengers who do not tip at all
Source: John A. List, University of Chicago, and others
The Economist January 15th 2022
charge escapes the 20% value­added tax
1 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 in­
40 60 80 come­tax underreporting was because em­
ployees did not report income in tips,
though this has become harder as tips are
more often put onto credit cards.
So who really benefits? Perception often
matters more than reality. As long as serv­
ers think their tips will dip if their perfor­
mance is poor, the management will reck­
on they have the desired effect. A survey of
1,189 servers found that half said that the
quality of their service had a large or very
large effect on the size of their tips. At­
*Respondents could
give multiple answers
tempts 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 Za­
chary Brewster of Wayne State University
found the same effect in restaurants, par­
ticularly in cheaper establishments. They
suggested that better wages or better train­
ing were more likely to improve service,
especially in fancier restaurants.
Hard to crack
Not that the practice is universally loved.
In effect, tipping reserves 20% of a restau­
rant’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 di­
verting 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 tip­
ping. Without it he reckoned he could not
set attractive prices and keep competitive
wages for his waiters. He struggled to man­
age a system whereby customers felt ob­
liged to say “thank you” merely by voice—
but not with their wallets.
Critics say tipping is an unfair practice
2 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 efficient
way to align incentives between bosses
0.04 and workers, and a healthy way for the cus­
tomer to express gratitude.
For all its drawbacks, Americans are
0
keenest to retain the practice: in a survey
60% of them said they preferred tipping to
-0.04
a modest service charge. Customers may
not be right that tipping improves service.
-0.08
Perhaps they like to feel, as they step out
65+ for a meal, that they are in control. And it
may comfort servers to think, however er­
roneously, that if they perform better they
will be more handsomely rewarded. n