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.