An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping

[Author Affiliation]Matt Parrett, Deloitte Tax LLP, 136 Peachtree Memorial Dr. GA6, Atlanta, GA 30309, USA; mparrett@vt.edu; corresponding authorFunding for this research was provided by the National Science Foundation (SBE-0241935).[Acknowledgment]I want to first thank Catherine Eckel for her numerous comments and suggestions, as well as for her guidance throughout the writing of this paper. I also want to thank both my discussants and the participants at the 2003 ESA meetings in Tucson, the 2003 SEA meetings in San Antonio, and the 2004 ASSA meetings in San Diego for their helpful comments. I am also grateful to Selhan Garip for help with the experiment. Finally, I want to thank the two anonymous referees, as well as the Editor, Laura Razzolini, for their insightful comments and suggestions. I would like to dedicate this paper to my late uncle, Joe Bland, whose thirst for knowledge was unquenchable and contagious.1. IntroductionRestaurant tipping is a significant part of the economy. In 2003, sales at full-service restaurants totaled approximately $151 billion (U.S. Census Bureau 2005). Assuming a tipping norm of 15%, waiters and waitresses in the country earned roughly $22.7 billion in tip income in 2003. Restaurant tipping is also puzzling, at least from the point of view of standard neoclassical economic theory. Why do consumers voluntarily give money to their server after the service has been rendered? Interestingly, consumers still leave their server a tip even when they plan never to visit the restaurant again (Kahneman, Knetsch, and Thaler 1986).In this paper, I explore several determinants of tipping behavior using survey and laboratory experimental data. First, I examine social norms related to reciprocity and letdown (guilt) aversion. Reciprocity refers to the idea that people reward kind actions and punish unkind actions, and implies a positive relationship between the size of the tip and service quality. According to Fehr and Gachter (2000), there is considerable evidence that suggests a strong role for reciprocity in motivating human behavior.1 The theory of letdown (guilt) aversion asserts that decision-makers avoid letting others down. Charness and Dufwenberg (2002) show that letdown aversion implies that a consumer's tip depends positively on what the consumer believes the server thinks the consumer will tip.Although the relationship between service quality and tip size has been studied by several authors (Lynn and McCall 2000a provide a survey and meta-analysis), it is typically explained using either a buyer monitoring story (Bodvarsson and Gibson 1992; Lynn and Graves 1996) or equity theory (Lynn and Grassman 1990; Lynn and Graves 1996).2 Both Conlin, Lynn, and O'Donoghue (2003) and Azar (2004) mention norms in their recent work on tipping. However, the work by Conlin et al. makes assumptions regarding, rather than trying to determine as I do here, norms that operate in a tipping environment. Azar, on the other hand, is interested in how norms evolve, a topic that I do not address in this paper.I also examine three aspects of the tipping situation that influence how much consumers tip in restaurants: table size, the sex of the customer, and method of bill payment (cash or credit card). Looking first at table size, at least two factors are at issue, and they work in opposite directions. First, tippers may tip a higher amount in the presence of others at the table in order to assert social status. Status considerations play a nontrivial role in real-world interactions (Ball et al. 2001), and thus might induce consumers to tip more as a form of status acquisition or display. Alternatively, tippers may "free ride" on the tips of others at the table, and thus tip less. However, the common restaurant practice of adding an automatic service charge onto bills at large table sizes (usually six or more customers) suggests that incentives to free ride may dominate. …