"The Economics & Etiquette Of Tipping".pdf

Tipping is common in the US, and research suggests it can reduce the principal-agent problem by providing a monetary incentive for employees to offer high-quality service. In a restaurant setting, the owner may find it difficult to monitor the effort of waiting staff, but customers can observe the service and choose to tip accordingly. This approach can lead to an efficient match between workers' attitudes to service and the jobs they perform. However, the reason people tip is not entirely clear, with theories including repeat custom, altruism, and avoiding social stigma. Empirical studies have examined the relationship between service quality and tip size, but the approaches used are not without criticism. Despite this, tipping can create savings that are passed on to consumers and provide employees with an incentive to work hard, making it a potentially beneficial practice.