An economist’s guide to the unfortunate logic of tipping

Restaurant staff need to be compensated fairly for their work.
Restaurant staff need to be compensated fairly for their work.
Image: Reuters/Susana Vera
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As an economics major, I don’t believe in tipping. (It’s discriminatory! It doesn’t actually incentivize good service!) I don’t want to support a system I don’t believe in, so when I go out to eat, I would prefer not to tip at all. But my girlfriend says that by going out to eat at a restaurant, I’m essentially agreeing to their terms–which means forking over cash. Am I justified in refusing to tip on ethical grounds?

A lot of people say economists are jerks. Broadly, I disagree with this, but I have to say that I do not think you are helping the cause. I agree with your girlfriend you should tip, although not quite for the same reason.

First, a primer on the origins of tipping. Historians believe practice began in Tudor England. Sometimes it served as a token of appreciation (say, as a small gift for servants after a stay at a friend’s country house). It could also be an incentive for better service in taverns. In either case, you can think of tipping as a way of saying “thank you” for good service. This leads to the obvious question: What’s the economic point of saying thank you?

The best economic case for tipping is based on the idea of repeated interactions. Tipping may not lead to good service on your first visit at a new restaurant, but I can pretty much guarantee that not tipping will result in bad service on your second and all further visits. In a “repeated game” like this, it makes sense to cooperate with the social norm and tip, in return for having the waiter cooperate with the social norm of not spitting in your food.

From a purely self-interested perspective, you could argue that this logic doesn’t always hold. Let’s say you go to a restaurant in a distant city. You’ve never eaten there before, and it’s highly unlikely you’ll ever go there (or see your server) again. Why should you give your waiter more money than you have to?

Even in this case, there is an economic “efficiency-based” argument for tipping. Generally, we economists want people to be paid based on how productive they are. But servers in the US are underpaid even relative to minimum wage because part of their compensation comes in tips. Their base wage does not reflect their true productivity. By tipping, you are simply raising their wage to the efficient level.

All this said, I confess that I think the economics of tipping are not so great. Which is why I’m happy to see more restaurants moving away from it. Of course, we’ll have to pay more for our risotto and steaks accordingly. But perhaps that’s a just turn of events for someone like you, who at the moment is getting a free ride based on the tipping behavior of the rest of us.

What is the cost of convenience? The other day, I went to get underwear at TJ Maxx. They were only $12 for three pairs, but the line was really long–I might have waited about 20 minutes–so I left. Later, I got them online for $20. It felt worth it to me, but was it? And does the equation change for people in different income brackets?

Whether waiting in line is worth it depends on the value of your time. Since you opted to pay $20 for underwear that you could have purchased for $12 rather than wait in line, we can infer that you think 20 minutes of your time is worth at least $8. So you must value your time at a minimum of $24 an hour.

One way to think about whether this trade-off makes sense is to compare the value of your time ($24) to your hourly wage. Your hourly wage represents the amount at which you’re willing to accept work. If you make $100 per hour, then you’re probably comfortable paying extra so that you can spend your time more efficiently.

Another simple way to think about this question is to ask yourself whether you’d be willing to stand in line for an hour if someone paid you $24. If the answer is no, then you were right to leave the store. If the answer is yes, then you should have waited.

Either way, it’s true that people’s answers will vary depending on how much money they make. Bill Gates is not going to stand in line for $24 an hour, but there are certainly many people who would. It seems like you are, however, not one of them.

Emily Oster is an associate professor of economics at Brown University and the author of “Expecting Better: Why the Conventional Pregnancy Wisdom Is Wrong — and What You Really Need to Know.

Got an everyday problem that could use an economist’s point of view? Send Emily your questions at