Why Pay Extra? Tipping and the Importance of Social Norms and Feelings in Economic Theory

Tipping is a multi-billion-dollar phenomenon that standard economic models find hard to explain. I discuss several aspects of tipping and divide tipping to six different categories: reward-tipping, price-tipping, tipping-in-advance, bribery-tipping, holiday-tipping and gift-tipping, and discuss the economics of each category. Often tipping has economic justification, because it solves some inefficiency and increases welfare. Analyzing the potential reasons for tipping illustrates the importance of social norms and feelings (e.g., embarrassment and unfairness felt when one does not tip) in motivating economic behavior. Retaliatory behavior that workers sometimes exhibit towards non-tipping patrons is then discussed, and ideas for future research are proposed