Tipping point: Morality, group psychology influence gratuities

You probably didn't stop to consider that the $2 tip you left the waiter at lunch today involves a complex web of social psychology, personal morality and economics. In a study of the tipping behavior of individuals and groups, W. P. Carey School of Business economics professor William J. Boyes and his colleagues agree that tipping is "in essence, an implicit contract created between employer, employee and customer." But it's not just the quality of service that determines a customer's tipping behavior, Boyes says. Variables such as a group's size, type of event, even the sex of the customer are some of the factors at play.

When a restaurant check arrives at the table, diners engage in an on-the-spot performance evaluation of the waiter or waitress before deciding how much to tip. Besides people skills, an appreciation of good service and the ability to figure percentages, tipping also involves quite a bit of morality and some group psychology, according to a research paper co-authored by William J. Boyes, an economics professor at the W. P. Carey School of Business.

In their study of the tipping behavior of individuals and groups, Boyes and his co-authors write: "In essence, an implicit contract is created between employer, employee and customer." Tipping takes place in service professions in which it is hard for employers to directly supervise employees.

"It is commonly accepted that the practice allows an employer to monitor an employee's performance by delegating the monitoring to customers," the paper states. "The problem in many cases, such as that with servers at restaurants and with bellhops at hotels, is that the customer has an incentive to participate in a moral hazard by providing a small gratuity no matter the quality of service."

Hazardous duty

In an interview, Boyes further outlined the concept of moral hazard. "Moral hazard refers to a situation where two entities, individuals, etc., have agreed to a contract or performance — and then after the agreement, one party changes behavior," Boyes explains. "An example would be someone being a safe driver, getting safe-driver car insurance, and then driving like a crazy person."

Participants on both sides of this implicit contract have opportunity to engage in a moral hazard, Boyes explains. For service providers, the decision to engage in a moral hazard occurs when the tip precedes the service, leaving open an opportunity for the worker to turn the tables on a chintzy customer.

Consider skycaps at airports, the study says: The old American Tourister commercials, where an actor in a gorilla suit abuses luggage, illustrates a case in which a service worker can turn the tables on a customer. Diners can engage in moral hazard by stiffing the server, providing a lousy tip or — in a group dinner — free-riding on their dining companions' tip generosity.

How are moral hazards kept in check? In a word: monitoring. "The interaction of monitoring with free-riding is seen in the responses to a survey we conducted involving 360 people contacted at a shopping mall about their motives for tipping at restaurants," the paper states. "In rank order of preferences, the reasons they gave were: (1) to ensure good service in the future; (2) to be fair to servers; (3) to not be embarrassed; and (4) because everyone tips."

Although it is simple for a diner to walk out without leaving a tip, the authors found that "while tipping may have arisen as an efficient way to monitor employee behavior, other mechanisms, principally the cost of social disapproval and the minimum salary provided by employers, exist to minimize the moral hazard and free-riding effects."

Costs of social disapproval

The authors empirically examined monitoring, free-riding, and social acceptance in restaurant tipping by surveying patrons and servers at 18 restaurants in Phoenix. Monitoring, it turns out, is a two-edged sword, depending on the size of the group. "The larger the party, the more difficult it is for any one patron to monitor the behavior of another party member and thus the greater the likelihood that one patron's tip will be smaller than otherwise would be the case," the researchers found.

"But, the larger the party, the greater the costs of social disapproval — more people perceive the free-rider as being 'cheap.' " Boyes, Mounts and Sowell — and previous researchers — have found "an inverse relationship between tip size and party size," which explains why many restaurants impose large-party gratuities to prevent free-riding. Surprisingly, the paper states, the positive and negative incentives provided by party size offset each other.

That is, while it is easier for a member of a party to escape monitoring by others when the party is larger, if someone is caught free-riding, the penalty of disapproval imposed on the free rider from a larger party is greater than from a smaller party.' The purpose of the dining occasion is a large determining factor in tipping behavior.

"The greater the cost of social disapproval between party members, the higher would be the gratuity provided,' the paper states. "It would seem likely that the cost of social disapproval would be higher in cases where the patron is attempting to favorably impress other members of the party, such as in a business meeting or date as opposed to the case of a family outing."

The paper also states that men tip a bit less than women do but that "the willingness of men to free-ride is more than offset by their desire for social acceptance whereas this is not the case for women." Also, the paper states, the price of the service consumed bears heavily on the percentage of the tip. At higher-priced dining establishments, the tip percentage is higher than at a Denny s, for example. As a night's bill increases with dessert, coffee and after-dinner drinks, so does the percentage of the tip.

Tip percentage also was linked to whether a diner is a Phoenix resident; nonresident tips were less than residents' gratuities. This makes sense, since residents would be more likely to be repeat customers and thus expect to run across the server in subsequent visits. The professors cite historical research showing that tipping may have begun in the Middle Ages when traveling feudal lords tossed coins to roadside beggars to ensure safe passage.

Another form of tipping developed in Tudor England, when visitors paid hosts' servants for their extra work in accommodating them. Possible origins of the word "tip" are the Latin word "stips," meaning gift; the Dutch word "tippen," meaning to tap a coin to attract a server's attention; or "To Insure Promptitude," a message inscribed on boxes in 18th-century English coffee shops.

Tips and taxation

According to the researchers, the going tip percentage nowadays is close to 20 percent. When restaurants automatically set gratuities to the bills of large parties, it typically is 15 to 18 percent, Boyes says. In the 1980s, tips became subject to federal income tax, which might seem likely to prompt some customers to be slightly more generous, although Boyes says his work has not shown evidence of that. "People generally do not realize that tips are taxable," he says.

Tips are a significant part of a business's expense/entertainment budget. Some companies leave tipping decisions up to their employees' judgment. Others do not. "I do not have general evidence on this — anecdotal evidence says that some companies provide guidelines, not definite percentages," Boyes says.

The research study was co-authored by William Stewart Mounts Jr. of the Stetson School of Business and Economics at Mercer University in Macon, Ga., and Clifford Sowell, an economics professor at Berea College in Berea, Ky.