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Old November 8th, 2012, 03:57 PM
delgados129 delgados129 is offline
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Default Food for thought

Don't mean to revive an old thread, but the following economist's perspective will hopefully provide some food for thought:

Tipping: The Economics of a Social Norm (starting at page 4, found at http://128.118.178.162/eps/lab/papers/0309/0309002.pdf):

Quote:
...Sisk and Gallick (1985) claim that tipping (reward-tipping according to the categories mentioned above) is an arrangement that protects buyers from an unscrupulous seller. Their interpretation and justification for tipping (with some complementary ideas of my own) is as follows. Often, what ensures the buyer that the good purchased would be satisfactory is the ability to return it to the seller if it is of inferior quality. It is usually impossible to return services, however. For services, one mechanism that ensures quality is the reputation of the firm. The firm does not provide low service quality because consumers will avoid purchasing again and may also inform other potential buyers about the low quality. If the worker who provides the service does not have enough incentives not to harm the firm’s reputation, however, the worker is not likely to exert enough effort to provide good service. The firm can sometimes monitor the worker to ascertain that service quality is good; this may be too costly, however, meaning that the cost of monitoring exceeds the benefits from increased quality. In particular, if the firm deals mainly with non-repeated customers who do not communicate with future potential buyers (a restaurant that caters to tourists, for example), the benefits from increased service quality are reduced.

Whenever the firm does not monitor the worker and the worker does not have incentives to provide good service, the buyer may be hurt by expecting and paying for good service and receiving bad service. When the cost of the service is high, the buyer may find it optimal to use litigation in order to be compensated. When service quality is unobservable to a third party, or when service cost is low, the buyer usually finds it optimal to pay despite the unsatisfactory service. This gives unscrupulous sellers the ability to maximize profits by providing low service quality at low cost rather than good service quality. Of course, in equilibrium the buyer may expect bad service quality and the market for good service quality may collapse, as in Akerlof’s (1970) seminal article about the market for lemons.

To overcome this potential problem, tipping makes part of the equilibrium price discretionary and contingent on service quality. The consumer no longer has to prove that service quality was bad; he can reduce his tip according to service quality without having to go to litigation. The worker has an incentive to provide good service because otherwise he may earn lower tips. In a way, tipping may protect both the buyer and the seller from costly negotiation. For example, if service in a restaurant was bad, the buyer may not want to pay the full price of the meal, yet there is no natural agreement with the owner what the discount for the bad service should be. Tipping provides a focal point for the negotiation: in most cases, the consumer pays the menu price but does not tip, or at least reduces the tip. While the buyer can in principle abuse his position as the last mover and not tip even when service is satisfactory, such behavior is rare.

Conlin, Lynn, and O'Donoghue (2002) analyze the case of restaurant tipping (their analysis is applicable also to other forms of reward-tipping, however) and suggest that if efficiency requires the server to exert some effort, the server must have an incentive to exert this effort. While a service contract can provide this incentive, writing such contract between the customer and the server involves prohibitive transaction costs. Therefore, tipping serves as a substitute that economizes these transaction costs...

Last edited by delgados129; November 8th, 2012 at 04:10 PM.
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