The Economics of Tipping

Abstract

Tipping involves dozens of billions of dollars annually in the US alone and is a major income source for millions of workers. But beyond its economic importance and various economic implications, tipping is also a unique economic phenomenon in that people pay tips voluntarily without any legal obligation. Tipping demonstrates that psychological and social motivations can be a substantial reason for economic behavior, and that economic models should go beyond a selfish economic agent who has no feelings in order to capture the full range of economic activities. This article discusses some aspects of tipping, with an emphasis on economic issues: the history of tipping, the main reasons for tipping, why tipping could be a welfare-increasing and sustainable social norm, the relationship between tipping and service quality, how tipping represents a struggle over rents, and issues of discrimination and sexual harassment related to tipping.