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Abstract
A few upscale restaurants in the United States have recently ended the practice of tipping their waitstaff, preferring a fixed-labor-cost method of compensation. This attempt to change a longstanding cultural practice presents a fascinating opportunity to explore economic concepts including principal-agent problems, gains from trade, price discrimination, and cultural institutions designed to build trust. I argue that tipping remains an economically efficient way to provide quality service: restaurant owners, waitstaff, and customers all benefit. The norm of tipping also provides an excellent example to teach basic economic principles to students and foster classroom discussion.
JEL Codes: A13, A20, J33
Keywords: gratuities, tipping, principal-agent problems, gains from trade, price discrimination, social norms
I.Introduction
A new trend is sweeping the restaurant industry. It isn't the latest India pale ale or avocado toast. Nor is it a novel way to make reservations with a smartphone. Rather, it is a movement to eliminate the reliance on gratuities as a partial form of compensation for waitstaff. Instead, some establishments now rely on a fixed "living wage." Restaurants such as Ivar's Salmon House in Seattle, Bar Marco in Pittsburgh, Chez Panisse in Berkeley, and more than a dozen of Danny Meyer's sit-down restaurants in New York City have jumped on the "no gratuities" bandwagon (Tu 2015; Terenzio 2015; Erbentraut 2015; Passy 2014). Besides the ostensible concern for the waitstaff's financial well-being, other reasons restaurateurs have given for this policy change include customer preference (Erbentraut 2015); avoiding the managerial hassle of dividing gratuities among other workers in the establishment (Passy 2014); happier employees (Terenzio 2015); and even concerns over mitigating sexism and racism (Terenzio 2015). Journalistic accounts of restaurants implementing such a policy usually champion how this new practice has supported the business's financial health, though no systematic empirical study of successes and failures has been conducted to date.
Gratuities aren't just unpleasant for a small set of restaurant owners seeking a better model for compensating waitstaff; they've also been historically unpopular with customers. Cultural historian Kerry Segrave has detailed attempts to eliminate the use of "vails" (tips) to reward servants as far back as the eighteenth century in Scotland and England, though rioting by those servants in London quickly ended that effort (1998, p. 2). Segrave further documents that...