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The Tragedy Of The Common Tip Pool…

September 15th, 2013 · 9 Comments
Behavioral Econ · Econ 101 · Incentives

If you’ve been reading here for a while, you’ve probably caught on to the fact that I’m really into incentives. If you know me in real life, you’ve probably caught onto the fact that I hate tipping. No, not like that- I’m not a crappy tipper, I just really dislike the whole tipping system, mostly because the incentive system that is supposedly created isn’t structured properly.

Theoretically, a tip left at the end of a meal is supposed to act as an incentive for good service, but there are a number of structural problems with this setup:

  • Tipping only works as an incentive if the server believes that a reasonably strong effort to reward relationship exists. In practice, this is probably not the case, since a lot of people are just universally good or bad tippers and don’t change their behavior on a case by case basis. Furthermore, even if people do alter their behavior based on their perceived level of service, there are enough external factors that the server may not see the feedback as strongly correlated with effort.
  • Adding to the previous point, the customer is in no way obligated to tip well if service was good, so there is little motivation for a rational customer- especially a non-repeat customer- to play the tipping game in a way that creates the proper incentives. (In other words, the tipping system is largely predicated on customers not being economically rational.)
  • Behavioral economics research suggests that small monetary incentives can actually reduce effort, since they appear to crowd out general altruistic tendencies.

(Protip: If you want good service from a bartender, try obviously overtipping on the first drink- as in “leave the tip that you would give on all of your drinks combined on the first drink.” I doubt that most bartenders would think that you will continue overtipping on future drinks, so you’re not really being misleading but instead showing that you’re making a good faith effort to not be a stingy jerk. In any case, I’ve seen this strategy be very successful.)

The above issues are by no means an exhaustive list of the problems with the tipping system- for example, tipping tends to amount to de facto discrimination, and don’t even get me started on my friend who is a jackass to servers because he has to “make them work for their tip”. Given that the incentive system is flawed in a number of ways, I really wish that restaurants would act like this one and rethink the tipping model. (Sidenote: that article has a number of useful links to research done on tipping.)

I’ve clearly thought about this issue a lot (it probably doesn’t surprise you that I’ve had a number of roommates who have worked in restaurants), but I’d somehow never considered that the fairly typical logistics of the tipping system actually result in a form of the tragedy of the commons. Luckily, others have got me covered. One feature of many tipping systems that I didn’t mention earlier is the process of tip pooling- i.e. bringing everyone’s tips together and then dividing them up evenly among the relevant parties. (The roommate who is good at selling expensive bottles of wine has more than a little to say regarding this practice.) So how does this result in a tragedy of the commons?

We usually think of the tragedy of the commons arising because parties (read, cow owners) don’t think about the costs that their actions (read, letting their cows graze) have on the overall system (read, common pasture) unless they have to pay those costs themselves. In this setup, a resource gets overused (read, the cows overgraze) compared to what would be optimal for society. If we were to apply the same logic to benefits rather than costs, we would see that tip pooling could lead to inefficiently low levels of effort because ignoring or pissing off a customer enough to lose, say, a $20 tip only reduces a server’s income by whatever portion of that $20 he would have gotten from the pool. This results in a suboptimal outcome for the system, and it’s worth noting that one solution to the typical tragedy of the commons is to assign patches of grass to each cow owner, which is basically analogous to having each server keep his own tips.

That said, tip pooling may have some upsides in that it could get servers to not focus on the tip amounts and therefore might restore the altruistic tendencies mentioned above. (It certainly helps on the discrimination front as well.) On the other hand, tip pooling could exacerbate the problem of small payment amounts crowding out altruism and intrinsic motivation, since it makes any given payment for effort smaller but doesn’t eliminate it entirely. If tip pooling merely mitigates some of the downsides of the tipping system at best and potentially introduces additional inefficiency, I’m going to humbly suggest that perhaps trying to patch a broken system is not as good of a plan as getting rid of that system entirely would be. Maybe it’s the behavioral economist in me talking (it usually is), but I can be convinced that trusting people to do a good job (especially when their work is observable) is a better plan than clinging to a poorly designed incentive scheme.

Update: Since this post didn’t have a visual, I figured I would add this in- it’s either cute or condescending, depending on how you look at it, but either way it really highlights the absurdity of the tip system.

Tags: Behavioral Econ · Econ 101 · Incentives

9 responses so far ↓

  • 1 BZ // Sep 15, 2013 at 7:18 pm

    Awesome article — exactly the sort of stuff I dig through econ blogs to read. Bravo Ms. Beggs.

  • 2 Dave // Sep 15, 2013 at 9:39 pm

    In terms of putting incentives in the wrong place, I think tipping is even worse than you explained.

    Although I’ll sometimes tip less for bad service, I will never intentionally tip poorly or withhold a tip. Because of the the way servers get paid, if you withhold a tip entirely or give a trivial tip, you are basically stating that the server should not get paid. I don’t know about you, but I occasionally goof up at work, and I still expect my boss to pay me. I suspect that most people are like me — they’ll only tip so low and no lower.

    This results in an incentive system that is bizarrely lopsided. Of course, if I get poor service at a restaurant, I am less likely to return to that restaurant. So the rewards for this incentive system are lopsided: If the service is outstanding, the server may get a better tip, and the restaurant owner wins with repeat business; however, if the service is poor, the server will still get a decent tip, but the restaurant owner loses a customer.

    I don’t mind the idea of a tip, but the servers need to be paid well enough that patrons do not feel obligated to tip — that way tips will, in fact, be a way of rewarding outstanding service — tips would be like bonuses, rather than like wages. Your idea of getting rid of tips entirely would also be fine with me — I just don’t think it has to be pushed that far to mitigate the effects you outlined.

  • 3 Cory // Sep 16, 2013 at 2:58 am

    While I really do like the idea of tipping being bad incentive wise, you do forget one really big thing with tipping…

    Taxes.

    A lot of waiters and waitresses can fudge how much they make in tips and therefore not get taxed on it. Many waitresses and waiters work under the table (or at least most of my friends in high school and college did 😛 ) so while the incentives aren’t there to create better service, tipping does provide a more beneficial/less costly way of making money.

    I’m sure that if you paid a regular hourly wage to a waiter, it’d be harder for them to take some of that money under the table – if any of it. While we can debate the ethics of not having the government get a slice of your income, that is part of the structure of tipping that may be good.

  • 4 Anthony Cutler // Sep 16, 2013 at 9:50 am

    Economics shows the pitfalls of two extremes of behaviour in rewarding people: reward the team at the end of the year and you fall into the Ringelmann effect, reward the individual for an item of service and you may have rewarded noise and will be disappointed by the regression to the mean.

    Economics often makes an exact criticism of the folly of two extremes of behaviour but finding the optimum is always much, much harder.

  • 5 Jackie Gherold // Sep 16, 2013 at 8:22 pm

    lol yea that video is pretty much how it goes. Its sad, really sad.

  • 6 Allen // Oct 4, 2013 at 4:45 am

    Wow. Loved the video but the whole tutorial and the comments after the video are wwwaaayyy too much. So over board! And he doesn’t agree with the whole system of tipping? What’s not to agree with? You sit down eat and get service and if you don’t feel as though u should tip, then don’t go to a restaurant. Did you see how joyed those servers were when they got tipped that much? At that point it had nothing to do with the “economy and the economists view of how things need to be structured” it was just three servers that dealt with assholes all day and made enough money in one night to pay a couple bills. If you don’t agree with tipping and you’re going out and buying coffee and not leaving at least a quarter you’re just a shitty person that doesn’t like to bring joy to people and that’s how you’ll be remembered by people who know you and you won’t be remembered or missed by the people who don’t.

  • 7 Gary // Oct 15, 2013 at 5:05 pm

    The problem with most tip pools is workers are being forced to contribute their tips to a pool that is controlled by the employer. No worker should have to give up what customers chose to give them. Tip pooling must be strictly voluntary and not a condition of employment. When tip pooling is required, employers place themselves in the position of spending their worker’s tips. Most employers end up using their worker’s tips to pay employee who receive less in tips or no tips at all. The more in tips they can offer workers, the less in hourly wages they can offer.

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