 This is a paper that I just recently wrote for API conference. It's called Teaching Tips, an Economic and Pedagogical Defense of Gratuities. I've been talking about tipping for a long time in a number of my undergraduate classes, and one of my students had said that that's about the only thing that gets me excited, or at least I get very excited when I talk about gratuities and tipping. And so he said, you should just sit down and write a paper about it. And I finally did and wanted to make this a paper and a presentation for folks, because I do have a lot of fun with it. And the first thing you have to do when you have a paper or any kind of project, you've got to have some motivating questions here. And I have two major motivating questions for this study or for this talk. The first one of these is from the news in the last five years or so. There's been a movement by some kind of mid-tier to upper-tier restaurant, smaller boutique restaurants to move away from a tipping model for their wait staff and move toward a living wage model. So they don't require, in fact, they ask that you do not tip the servers, and instead they pay a living wage of $15, $16, whatever they might want to do. So in Seattle there's one Ivers clam house that actually moved in that direction as well. So that kind of motivated me to see what's going on. So the first question has is the movement to a no gratuities in living wage model for restaurant servers and efficient model. Theoretically, I'm going to examine that question. There's been a little bit of empirical work done on it, but not very much. So I can see myself moving there empirically. The next question is an age-old question. If you're a rational choice theorist and you're going on the basic assumptions of microeconomic models, there's an interesting puzzle with tipping or gratuities. Why would people leave a tip at a restaurant that they know that they would never return to? Because you're tipping at the end, and if you're a rational maximizer, why leave money on the table when you don't have to? The menu pricing says you pay $15 for your meal. Why give an additional $1.50 or $2? Why not just walk out and pocket that $2 in and of yourself? And a few scholars have puzzled on this. Armin Alkein has asked this question and Milton Freeman have kind of puzzled about this thing. So I'll have some answers to that one as well. Any good talk that starts with some motivating questions, especially if it's an academic or scholarly talk, also should have some arguments upfront. We're just at another graduate colloquium a few weeks ago, and one of the other faculty members had some very good advice to the graduate students and young scholars. When you're giving a talk, make sure that the people know the answer upfront. This isn't a mystery novel where you want to fool them until the end. If anything, it's like Colombo, and if you've ever seen the television series Colombo, great social science because you see the murder, you know who did it, and then from that point on, Colombo does the filling in the logic, which is a lot of how social science actually works here. So let me give you my central arguments that I intend to make through the course of the next 20, 25 minutes or so. The main argument here is that I do believe that tipping is an efficient institution, and this gets people irritated because a lot of people I talk to say, I hate tipping, I never want to tip, I wish they'd get rid of tipping at restaurants and in taxi cabs and all these other places. It's really annoying, why do they keep this thing around? It seems like it's not a very popular economic institution, yet it still persists. So we want to kind of figure out why it persists. I tend to think it's efficient, so I want to make the theoretical case that it is an efficient institution. For the following reasons, the first being it solves the principal agent problem. Principal agent problems are ubiquitous, and tipping is a par excellent example to convey to students that you can solve the principal agent problem in a rather creative manner. We'll get to that in a second. The next one is a little bit different, and I kind of step outside the box of traditional microeconomics here and pricing theory, and my argument here is that tipping allows for voluntary price discrimination, and that's very beneficial to restaurant owners, as well as other establishment owners in the service industry that rely upon gratuities as a way to compensate their labor. And then finally, do you answer that question, would you tip at a restaurant you know you would never return to? This has been hinted at by other people, and I think Milton Friedman is one of the ones who has hinted at this. Tipping provides a cultural institution that provides norms of trust in a society that actually fosters anonymous trade. Here I go a little bit more macro, it's not as a micro-oriented type of analysis, but it's an interesting area of exploration, of scholarly exploration that I'm starting to dip my toes into. So we'll talk about that in a second. And then the other part of this talk, I said there's going to be an economic defense of gratuities, but also a pedagogical defense of gratuities. Over the years I have found that talking about tips is a fun way to introduce students to a lot of economic concepts in ways that bring it home to them and say, oh yeah, I was at a restaurant, should I have tipped or shouldn't I have tipped and they get confused on this, but they engage really quickly. Every class that I start talking about tipping, we can easily go on for three hours of non-stop conversation on tipping because so many people have different experiences from different parts of the world, have different examples, and it's a great way to teach a lot of these concepts. So if you're moving into the pedagogical world of teaching, you might want to feel free to steal some of my ideas here. All right, let's first start off with the first part of the argument, principle age and problems. Welcome to those of you listening on YouTube, the live feed. Welcome. Principle age and problems are pretty simple. You have two people, a principal, you could think of it as an employer and an agent, a person who is an employee perhaps, that don't have the same interests. They have similar interests in common, but their interests are different enough that the principal who gives a task to the agent wants the agent to do something, the agent has an incentive to perhaps shirk or do something different, and that causes a problem. How does the principal, the employer, make sure that the employee, the agent, is doing the things that the principal wants him to do? There's a lot of different ways you could think about solving these things, and this comes up in the restaurant industry quite a bit. So let's use the restaurant example here because it's where tipping or gratuities are most prevalent here in the United States. And you have two people here. You have a restaurant owner, which I'll have the person with the chef hat here, and a hungry diner. And the restaurant owner wants to provide some great service to the restaurant diner. The diner wants to have a great experience, and so those two are going to engage in some mutual exchange here. And if it's just the chef cooking for the diner, there's no problem here. The chef is going to cook the best food possible, have the best service possible, give that person the best experience so they have a nice time. They'll pay a little bit more. They'll come back in the future. They'll spread word of mouth. But the problem is that if you want to serve lots of people, you as the restaurant owner can't do it all by yourself. You're going to need to hire out other people, some cooks in the background, or cooks back in the kitchen, some dishwashers, as well as people who bring the food out and serve the people in the restaurant. You hire some wait-staff people. Here you start to have a principal agent problem. The first principal agent problem exists between the chef and the wait-staff, waiter or waitress here. The chef wants, or the owner of the restaurant wants to motivate the wait-staff to give the best service possible because service is part of the overall restaurant experience. It's not only the food, but it's how you treat it, and the ambiance and a few other things into that as well, so they need to motivate pleasant experience. Now, we've probably all been to restaurants where we've had great experiences. I was just here at Hamilton's last night, wonderful experience, and you've probably been at restaurants where the service is not too good. It just kind of ruins the overall experience, and you don't want to go back to that restaurant. Well, the owner doesn't want that to happen. They want to make sure that they motivate the wait-staff to do the best job that they possibly can. I'm following them on the floor to make sure that they're treating the customers right, but that is a waste of their time. They might as well serve the customers then as well. So if the wait-staff is out there outside of the view of the restaurant owner or the manager, how do you make sure that they're able to provide the best service? Well, if the wait-staff knows that part of their compensation is based upon how well they serve the customer and the customer has some control over this, they have an incentive to exert better service at this point in time, which brings up the second principal agent problem here as well. Is that you have a situation where the diner wants to have a really good experience and they want to be able to motivate the server to come back and fill water glasses or to leave them alone, perhaps, to pick up a number of different cues. Because there's different types of diners in a restaurant. Some people are going to the theater and they want to get served really quick and rush out. There are other people that want to have a nice romantic long dinner and not be bothered. There's other people like myself who like to sit around and chat with the staff saying, hey, what are the cool things to see around here? Tell me crazy things that have happened in the restaurant. So we all kind of demand different services here, so how do you motivate the staff to actually pick up on those cues and to serve you for quality service? In terms of also in addition to this, there's an incentive to want to motivate future quality service. If you're a regular at a restaurant or a restaurant that is fairly near to you or a tavern, you want to tip pretty well or you want service well in the future. Calling, can I reserve this special table? They want to give that to you. So one of the ways to do this is, hey, if you treat me well in the future I'll make sure I take care of you now. In fact, I'll take care of you really now, take care of you very well right now with a 20% tip so you know when I come in, I'm pretty generous. So give me that extra pour of whiskey if you possibly could. So that helps to solve this principal agent problem between the diner and the wait staff as well. So it's mutually advantageous this idea of tipping between the restaurant owner and also the diner to help motivate the server. Now interestingly enough, it's also and I make the case in the paper it's also very useful for the server as well. And for the server, right, this is it's a difficult job. A lot of people think well, you know, being a waitress or a waiter, that's not a very difficult job. It's a low-skill job. I don't contraire. You have to be able to pick up all these cues and things and some people are very, very good at that and the people who are good at that will get signals market-based signals that say, hey, you're doing a really good job. You're picking up 20, 22, 25% tips because you do such a good job maybe this is where your skills should be allocated in the market. This is a great place for you. And for those who are not as good as that they're only going to get 10% or maybe 5%. Sometimes they might not even get any tips at all and they might start saying to themselves, oh, wait a minute, why am I not getting any tips? Maybe I'm grouchy, maybe I'm slow and I'm not picking up on any of these cues from the service. Those people are going to realize this isn't for me. Maybe I should go employ my skills elsewhere and overall that actually helps to improve the restaurant industry because the people who don't have the skills to be good waiters or waitresses are the ones that leave the industry, leaving the good ones behind. And that's what I want and go to any restaurant, I want the best quality wait staff there as possible. So it turns out that actually this is a win, win, win in terms of the principal agent problem here. Works out great for everybody. That's why it's a very, very good way to motivate individuals in this restaurant industry and benefits the owner, the diner as well as the wait staff. All right. You think about this principal agent problem, you start thinking about, well, we do tip at restaurants but where else do we tip or where do we not tip? And so when I talk to my students I say, think about it. Are there principal agent problems that we solve using tipping? Where might they be or might not be? Well, we just talked about sit-down restaurants. It's pretty ubiquitous in the United States here that we use it there. But not so much with McDonald's. Not so much of a principal agent problem. You go to McDonald's, it's a pretty simple transaction. I give you a couple bucks, you give me a big Mac, it comes off the griddle, there's, I don't need a lot of service there. And it's pretty easy to monitor in a small area for the manager to know if you're doing well or not because you can see the lines and things like that. Starbucks baristas for lattes, a lot of people tip there. For future service. I have this 7-adjective drink that I have to make with special temperature. I want to make sure that's done perfectly every time. So you give a buck additional teach latte that you want and they make sure that you have that special custom service to that. But what about if you just buy black coffee, just drip coffee? That's all you have to do is pour it and hand it over. There's not much special attention that needs to be done there. It's a very simple task, easy to monitor whether you're doing a good job. Now some people do drop a few coins into the tip jar or tip box in front of the cash register. We'll talk about that in a second. But you typically don't tip as much there. Pizza delivery. I used to be a pizza deliverer. I understand that your future service is based upon how well you treat me the first time I meet you. If you give me a good tip, I will go out of my way to make sure that you get a great pizza on time. If you don't tip me so well, that's not good because then I got to drive to your house and somebody else could be picking up another delivery to a person who is tipping pretty well. So I might accidentally tip your pizza on the way over or it might be a little bit slow. So always tip your pizza delivery driver. But not garbage collectors. They come to your house every week just like pizza delivery does. But you don't tip them. Well, because you can kind of figure out well the garbage hasn't been picked up so they're not doing a very good job. Taxi rides. We tip on taxi rides quite a bit. And this creates an interesting problem related to why would you tip at a restaurant you know you never come back to because if you're visiting from out of town, it's unlikely you're ever going to see the taxi driver that you had. Why would you ever tip? That's an interesting question. The thing that came about over the past few years as I was talking about, somebody mentioned well, Uber drivers, you don't tip Uber drivers. Although interestingly enough on half the people I talked to do tip Uber drivers with cash. They don't have the thing on the app to add the tip until about two days ago. So I made this presentation about a week ago and then Uber decided to actually tip. I happen to think that I had something to do with it because I wrote a fortune magazine article saying why Uber should allow for tipping of their drivers. And that was about a month ago and now Uber is allowing tipping. So the impact that I have, right? I get things done. We'll talk about that maybe during discussion. Hair stylist, right? You want good future service and the more bouffante and big your hair is the more you're likely to tip. But not Walmart employees. Now this is an interesting one because when I ask students why do they tip at restaurants. The first thing is they say well we know that the wait staff has actually paid very poorly and we feel sorry for them. Well you know what Walmart floor employees are paid very poorly and if you have to ask them oh where's the shampoo I can't find is oh Isle 7 sir. Why not give them a buck? They're paid poorly. You don't do that though. You don't tend to do that because there's not as much of a principal agent problem there. You could say oh yeah they told me Isle 7. Oh it's an Isle 7. They did a good job. Easy to figure that one out. And you don't run across them as much. You might not be expecting as much future service to pay. Some waiters and waitresses actually get well above the minimum wage and pull down very very nice salaries throughout the year. We have a friend who made $80,000 a year being a waiter at a restaurant. That's good scratch. That's really good. Hotel housekeeping. You tip a hotel housekeepers. Or do you? I didn't know about this until a few years ago. Actually a few months ago. About a year ago. I never tipped the hotel housekeeping staff. How many people do tip hotel housekeeping staff? I'm just curious here. A few people. Other people don't. Other people without their hands racing. I feel pretty bad now. Well we'll talk about why that might be the case or might not be the case. Especially if you're staying for several days or several weeks and you want an extra little bottle of shampoo put there so you can take it home. You want that. Or you want your service done early in the morning so you can work on things like that. Self-serve frozen yogurt shops. Do we tip there? They put out tip jars. And I've been seeing this more and I say to myself there's not a principal agent problem there because all they do is weigh the yogurt and charge you. So what the heck is going on here? I think this is also related to why we tip a little bit for drip coffee. If your bill comes up to $5 and 87 cents you take the additional 13 cents. You don't want to carry it around much anymore so you put it into a bin. Some of these self-serve yogurt shops now have these clever games saying who's the better person, Auburn or Alabama tip which one to fill it in so it creates kind of a contest. You want to give a little bit more here. It says who's better, Mark Sanchez or Tim Tebow? There's no money in either of those things. Which is kind of interesting. Okay so that's the explanation that relies upon principal agent problems to explain why we tip and why we think it's very efficient. It does solve a lot of principal agent problems in a very effective way that gives the customer control and also gives the principal or the owner a great deal of incentivizing features over their employees as well and I think it's kind of neat. Here's the other one that's not talked about as much and I'll be interested in getting your ideas on this. Self-selecting price discrimination and a lesson in gains from trade. Probably not on the live feed but there's something really really bad for a restaurant in this picture and that is empty tables. There's an empty table right here and there's an empty table right here. Since you have the space you want to get it filled. If it's not being filled that's a lot of dead weight loss. You're still paying rent on it. You're paying the waiter or the waitress to be there just in case anybody shows up. So having unfilled tables is deadly for a restaurant. So how can they use tipping to solve this problem? Well, it relates to the concept of gains from trade and this is a very important concept for undergraduate students to get because they often don't understand this and I have found that once they understand what gains from trade really are it unlocks the door to a lot of other economic insights and kind of chills them out on a number of different things and this is the way that I present it. Maybe other people have presented it before but in the past few years I found this is fairly effective. You have dollar denominations here from zero dollars to lots of dollars here and you have some customers. We'll call these restaurant customers. You have customers A, B and C who I'm going to call your mid-tier or upper-tier restaurant connoisseurs. They like going out for dinner quite a bit and they have what we call a reserve or reservation buy price. When they go out to a restaurant like Hamilton's they're willing to spend up X amount of dollars. It's not necessarily a specific point. It's kind of fuzzy but they have an idea. When I go out for dinner tonight I want to spend 80 dollars. Nothing more than that. Some other people they might not be as high end. This person might only want to spend 50 dollars. This person may be only 30 dollars. You're kind of low-end people. So those are your reserve buy prices. The maximum amount you're willing to pay for the food, the ambiance, the service experience as well. Then you have the restaurant owner. The restaurant owner has a reserve or reservation sell price and that's the minimum he's willing to engage and trade with you. Because the owner has to buy ingredients and flour and other different things. He has to pay the mortgage. He has to heat the ovens so you need electricity. You have to pay your staff as well. So part of the reserve sell price, that thing that factors into it, is the labor cost. And you want to try to keep these as low as possible because if you keep the reserve sell price lower you're able to capture more customers. You're able to capture more customers here. So the restaurant owner actually does have an incentive to keep the price pretty low. A lot of students think, no, restaurant owners just want to keep the price as high as possible and rip you off as much as they can. Which is this really kind of interesting thing that I have to disavow students. I always have a student who says Starbucks always rips me off. Always rips you off. Yes, every day I go buy a latte for $4 and that's too much. And I go, well, why are you buying it? And I say, how much is it worth you? Well, I kind of force them to say, oh, my reserve buy price is actually probably $5. And I say, oh. And what about that day that you have to go study for your final exam and you need to stay awake. How much would you buy a cup of coffee for that? I'd pay $10 for that. But Starbucks only charges you $3? Maybe you're ripping them off. Oh, the reactions I get from that. What? Because what I teach them about the gains from trade is that the difference between the reserve buy price of a customer and the reserve sell price of owner of an establishment is the area where you can get gains from trade. So if we're here for person A, they have a pretty reserve buy price. They're only being asked the reserve sell price here down for the owner. This area in here is the gains from trade. Anywhere that anything is priced within here, some of it might accrue more to the owner, some of it might accrue more to the customer. But you can kind of negotiate that. Now, this area right here when it comes to gratuities between the reserve sell price and let's say that the restaurant owner actually prices his menu items and the whole experience at menu price right there and the reserve buy price is the area that customer A could potentially tip. Wow, this was such a great experience. I had such a wonderful time. The food was fantastic. The service was impeccable. And so you go ahead and throw in another 15%, maybe 25%. I tend to be a big, I like to think of myself as being a big tipper because I like to reward people for that. And I like going out to restaurants and if I get great experience I'm going to reward that. So this is the area where the gratuities come in here. So for person B, their reserve buy price isn't as high so they're not going to tip as much. Person C not so much. Person D is probably not going to be a big tipper. But they're going to show up because at least the reserve sell price, the price that the restaurant owner is going to be selling at if it's the minimum price is going to capture this person. They might only be 8%, but you know what they're showing up. Maybe they're only 2%. But they're filling that table and that could be pretty good here. Person E here, they're just priced out of the market. They just can't afford it. The experience is not worth it to them so they're not going to show up here. So this is the kind of area between each of the reserve buy prices and that is this kind of zone where you as a customer can voluntarily price discriminate. And the concept of price discrimination is trying to figure out how to price an item or an experience based upon how different people value it. We all have different preferences for different types of service, different types of food and things. And it's with unknown information or with information unknown about this stuff it's difficult to figure out these people. What the tipping does is allow people to voluntarily do this, saying oh I really like service, I'll throw in some extra money. So long that there's a norm existing in society that is what you do to reward good service. To further explain this, what happens if we go to a no gratuities model and provide a living wage for the server. So what you're going to do is basically take the reserve sell price that the restaurant owner had before and price in a fixed amount for labor. So instead of allowing the customer to determine what the extra labor cost would be via the gratuity now it's going to be priced in. We're going to have the regular menu price plus 15% that's going to be sometimes they put this, the labor charge the service charge, sometimes it's 18%. So that's going to raise the actual price here and make it a fixed menu price. Now menu price is just what in economics we call a fixed price, it works out well because we think of menus and restaurants here quite a bit but this is the fixed price that anybody has to pay now. So it raises the reserve sell price of the owner quite a bit. I'm just doing this so you can see it, it might only be a small amount that they raise it, it might be a bigger amount this is just for illustrative purposes here. But here's what happens, that's kind of dangerous here. First thing that you notice is that customer D is actually priced out of the market. That's a table that will not be used. Person D used to come in every other week and fill a table, they weren't the best buyers and maybe they could have gave that to somebody else who was tipping highly but at least they were filling the table. Now they're not showing up anymore because it's just too darn expensive to actually show up. Person E is still priced out here. Person C right here they're just right there at the kind of limit. The dot should actually be lying right on that line as I did it. It says the reserve sell price now is their reserve buy price. So they both kind of benefit from this thing but any particular shock that could happen either way to perhaps the customer is worried about their job next week their reserve buy price might drop a little bit because none of our reserve prices are actually fixed. They vary according to time and tastes and things like that. So they might drop down. The owner is kind of worried if this person, yeah they're coming now but what happens in the future. The other thing on the other side is that service becomes variable. If service gets worse at the restaurant that person's reserve buy price is going to drop and they're probably not going to show up. And so that's a very precarious situation here. Some of the other things that you can observe from this table here as well is that now each person at the restaurant only has to pay this price here where the red line is. Customer A gets a lot from the gains from trade because they would pay much more. But they're not paying as much as they used to. That works out pretty good. They get more of the gains from trade. They get to keep it instead of dishing it out to the server where they might have in the gratuity models here. And so from the end of the server there's a benefit here that your wages go up. So waiters and waitresses go, yay I got a living wage now. So that kind of goes up. That's a benefit to you. The wage gain goes up. The difference between the green line and the red line here. But there's also potential losses because customer A may have been throwing more money your way in the past. You got an 18% fee and that goes to you for the labor. They might have been tipping 25%. And if there's a lot of people like this and if you're very good at serving people and getting 25% gratuity from them you actually lose out in this here. So it might be a net loss to you depending on how many customer A and customer B types that you have out there. So that becomes a problem. But the big problem is that you start to lose some of these customers and what happens you can see more empty tables and that's very dangerous. And this is why I think restaurant owners are fairly reluctant to move to the no gratuities model because it will leave people without it might potentially leave people out of the market there and that could be somewhat dangerous. The no gratuities model of service I think has some big problems and I'm very skeptical of restaurants moving to it. I think restaurants especially more low end restaurants are very skeptical of moving to it for the following reasons and some of these we've already covered here. First of all it eliminates voluntary price discrimination. You pay what's on the bill. Does your 18% service fee okay I can walk out there. Really wanted to give 15% but now I'm told 18% is fine. Could you add that under the table. Yeah you possibly could but when it's told that it's a fixed price okay that's what I pay that's what I walk out. It eliminates that aspect of it. It potentially shrinks the customer base we saw customer D priced out of the market there and potentially customer C precariously balanced their reserve sell price their reserve buy price and reserve sell price are right there any little shock to the system will eliminate them as a customer. Complacates the principal agent problem now. And now this is when I talk to my students they go well every waiter and waitress really tries hard you know why would this affect them because you know people aren't motivated by incentives that's my undergraduate students no really. I used to work in the service industry and I know that if I came to work with a headache sometimes a little hangover and stuff I might not give as much good service. Especially if it's a really annoying table I really wish those people would go away please go away and so you still bring them their food but you don't fill up their water glasses as much or if you you're not so worried about getting the correct order or having some cheerful banter if they want to talk to you say listen I don't got time I gotta go out to the back for a smoke you know and it's hard for the the managers to actually kind of please that that so it also the no gratuity model takes away the principal agent problem and I would argue that it's going to reduce the marginal quality of service and people that I've talked to seen some of these restaurants move in that direction anecdotally say yeah the service gets a little bit worse not horrendously bad but it's a little bit worse just a little bit enough to cause some problems on top of this it reduces signals to poor quality servers right if everybody is getting the same 18% added on as part of the living wage they're not you know I'm getting paid as much as the same person next to me they're a really bad server they're kind of grouchy why do I have to extend a little bit extra effort right I and so your service tends to go down a little bit if you're a good server you kind of get irritated that that really bad waiter is not is making as much as I am I'm better why should I'll just shirk a little bit more and overall the quality of service at restaurants tends to go down right the interesting thing in poor quality servers actually still stay in the the industry and so for me as a consumer if everybody goes to this model I can see that on average you're going to have less good service in the restaurant industry interestingly enough this no gratuities miles only been used at small higher and kind of medium high to high end restaurants where they're already have mechanisms to self select in a lot of the wait staff they've picked the they've picked the best cherries off the tree early on because it's a great place to work they can interview them they've had experience before they have a track record of people who've come in here so that's kind of interesting that many of these restaurants are arguing for that I'm almost wondering this is just a cynical conspiratorial suspicion that I have that might be some kind of rent seeking on the part of these restaurants that if they move more of these restaurants toward a no tipping model it's going to eliminate some of those the lower end restaurants some of you know like your olive gardens or denies or other places like that leaving them potentially with more business so I don't know it's kind of interesting that it's only used and also smaller restaurants where it's easier to monitor the wait staff not there's not you know 100 tables 10 or 15 that's kind of interesting to observe that haven't done a study on that anybody interested in doing that if you're fair game to do that or contact me and then finally I said what's up with Uber they're not allowing tipping until two days ago so that's they finally listen to me and they say Uber you should tip but they're tipping now so good for them one thing I want to say about the no gratuities models try not to be a libertarian jackass about teaching this stuff to other individuals in this city of Seattle we went up to a $15 minimum wage or we're on our way up there and it's become popular amongst some of the libertarian class to actually carry around this little card and not tip the wait staff here it says why I don't tip in Seattle economics 101 I'm going to teach you this you know waitress or waiter here as the compensation for your service increase there's a cost to me blah blah blah so I'm not leaving a tip screw you you don't teach people econ that way ok so that's one of the things that I do believe that tipping is a great way to be gracious gratuities to individuals and if you want to teach people you want to engage them you want them to like you first rather than just saying how you're screwed you haha because they're never going to come over to you know our side where we think the free market should dictate more of this kind of stuff than this kind of thing so be very careful when teaching as I found this is one of the reasons why I actually use tipping as a way to introduce lots of economic concepts before I even get into stuff about minimum wage and other things where people get pretty hot tempered about that which leads me to my final argument here oh no I'm sorry doesn't lead me to my final argument I have one more left this is the question here why would anybody leave a tip at a restaurant they know to I just made a case that gratuities are great for solving the principal agent problem and for restaurant owners and a few other service providers to fill up the tables or the hairstylist chairs but it's an odd institution because the customer doesn't tip until the end of the meal and if you're a rational self maximizer that's only interested in your self interest why not just leave I'll pay the menu price and I'll just leave I'm not 15% or 20% I'll just get up and walk away I'm not required to do it so why should I do it I walk away in that kind of thing it's a tough question to answer it really hits hard at those kind of basic assumptions about the self interested rational actor that we that micro economics often kind of supposes that we are so why would I leave a tip at a restaurant that I know I never would return to you well here's my argument for this we live in a pretty big market and we know that Adam Smith kind of gave us the recipe for economic growth and development early on he says what do you want to do is specialize because you come better at things you use resources more efficiently when you specialize things though you have to trade with other people and so specialization and trade is really kind of determined by the extent of the market so if you really want to be good at trade and specialization you need to have a very expansive market but when you expand the market you start to expand it into people that you don't know as well they're anonymous I didn't know anybody's at Hamilton's last night first time I've ever seen any of those individuals can I trust them to give me good service we're gonna engage in gains from trade maybe they're gonna rip me off should I trust them I'm worried about this because they're anonymous to me I don't know other people have vouched for them on travel or trip advisor or things like that so but I don't know can I trust them well anonymous trade does require trust so how in society can we foster this and this is where I start to escape a little bit more to the macro I think what's going on macro is that we somehow as a society understand that we need to build trust in society to have efficient operating markets and so we create a number of rituals that allow us to examine whether people are trustworthy or not so we have these normative rituals or rituals based on norms for trust billing tipping is one of them imagine if you were out with a client that you want to do business with and you go to a lunch you don't know this person very well and they skip out on the tip they said oh I'll pay for it and they pay what the cost was and they don't leave a tip and they left you sit and you go hmm I wonder if that person can be trusted in the future maybe they won't go out their way for me if I need a little bit of help at a certain point in time I don't know if I want to do business with them or another form of business dates if you go out on a date and you don't leave a big tip on that first date you won't have a second date and I know from experience that's not a good thing to actually actually my one of my date that I went out I actually pulled on a discount coupon to pay the waiter with and that was that was bad never saw that that gal again but that's good so we have a lot of other different things that we do tipping is one of them but we have other things such as gift giving why do we give gifts and usually when I'm teaching this subject it leads to this very interesting discussion to in class that again for teaching it fosters this other thing why do we give gifts at Christmas and birthdays and other events rather than giving cash because if you're a true rational economic maximizer cash is more fungible but we give gifts often times gifts that other people don't like those ugly kitten sweaters that you know you get you never wear again but you said oh thank you very much seems like that would have a lot of disutility for it but I make the argument is that when we do these sacrifices burnt offerings they used to call him in the Old Testament when you make these burnt offerings you're telling people that listen I'm willing to expend some resources I'm willing to give something of me because maybe somewhere in the future I might need something from you maybe even if we never meet again and your parents and your peers tell you you know in order for us as a society to cling together and to to build trust and to make markets work we all need to do that even though you'll never see anybody again treat them well I'm a big aficionado of the old west and there was a cowboy code you had a lot of itinerant people that would come and go throughout the west they were traveling back and forth you never knew anybody but there was a code that you always tipped your hat to a stranger you never look back you filled whiskies to the to the very top of the brim if you were sharing whiskey with somebody else these are all kind of signals that say I trust you you trust me we might never meet again but as a society I think we are much better off it's one of the answers that Milton Friedman I think in the book free to choose kind of hinted at and it really needs to be fleshed out a little bit more and I'm trying to do that in my own work here the question is how do such norms originate and change remember I talked about do you tip at a hotel I never knew that until I was in Boston and they had one of these envelopes out says the envelope please and says your room attendant is you know so and so Matilda was here to clean up your room or something like this and the envelope you know it wasn't there to mail them a nice letter you know throw in four or five bucks or something like that and I realized okay they're trying to basically signal to other individuals that it's okay to tip here so if more people tip they can keep their labor costs down they can make it look more like a restaurant which helps them to again leverage the principal agent problems in ways that gives better service for everybody overall but it's a if you're a game theorist it tends to be an assurance game where you need to kind of shift the equilibrium most people think you don't have to tip some people do we want everybody to do that so let's create a signal that tells us how to do that the big danger with Uber when they were going to the no tip thing and taxi drivers were well aware of this that if Uber doesn't accept tips what if people got into their cabs especially younger people are not familiar with the norm saying well I don't tip people when they give me a ride and the taxi cab driver doesn't get a tip not surprisingly they were on the side of a number of Uber drivers lobbying to get Uber to put in tips there because they could see the equilibrium in the assurance game shifting in another direction how do these things operate one of the great things that I have we have a number of people from other countries here as well I have students from all over the place some places don't tip right and they're really kind of confused when they come to the United States what do you mean tipping that's kind of odd and strange why would I want to do that kind of thing so you get into these discussions about this and it also allows me to introduce the the outside observer in Adam Smith's The Theory of Moral Sentiments a book that I really love I tend in terms of human nature I tend to be much more of a Smithian theory of moral sentiments than an Anne Rand type of individual that oftentimes gets me in trouble in certain audiences but you know Smith says you know in the back of our head we have this outside observer looking at a situation says how would you like to be treated if you were in that situation if you treat somebody poorly that impartial observer says that's not really good you should kind of feel bad about that and I think the cultural norms that we have and enhance that and keep these norms alive in many ways and I think a lot of interesting empirical and theoretical work could be done on that the other thing that I draw upon is James Buchanan and I love his book in the limits of liberty has this term he calls ordered anarchy that most of our life is not governed by formal rules despite the fact that us political scientists and economists oftentimes focus on those written rules the regulations and laws that are written by legislatures and city councils we tend to focus on it but Buchanan says you know if you really look at life most of our life is organized by these informal norms and if these informal norms start to break down that ordered anarchy becomes disordered anarchy and it's just not really good conflict arises and when conflict arises people start to call for more written rules more law and order and that can become very dangerous so I've become in many years a partisan of governance via informal norms and social codes or etiquette as he calls it or manners as he sometimes call it so interesting work being done there final note on teaching tips again I've studied religion a lot that's where most of my previous work has been done and I've seen that missionaries for a cause are usually best not when they throw things in people's faces like formal models and all those things but introduce find ways that connect with individuals things, experiences that they have work with them on those dimensions to explain a variety of different concepts that they want to share with them and then build from that rather than coming full on as my pastor once said all the new Christian that they just got converted because they run around from door to door with the Bible and knock on the door when somebody opens they go Jesus and then he goes ha ha Jesus kind of scares people sometimes and I think that's true with some of us political economists coming to people say liberty we should get rid of the minimum wage it's horrible you come in and you're such a horrible person they don't want to talk to you anymore but if you give them an example this is just one I think with tipping there's many other ways things you can do example where you show them okay this is how it works with tipping oh by the way this is how gains from trade occur you're a person who's buying Starbucks every day you're actually getting more value you might be ripping off they go oh yeah personal life in a non-threatening way and then they start to rethink issues about the minimum wage after to basically say okay now let's think about the minimum wage here and how this affects the gains from trade and whether people are going to you know come to the store and whether the restaurant owner is going to employ these waiters and waitresses in the future and stuff like that you already have them in the door and I think that can be actually very effective I think we have a great cause here for the case of freedom and free markets and liberty so the way we present it to other individuals becomes very important so for all of you who are young scholars and graduate students and going on to a career we're going to either teach in a classroom or teach people via your articles and books that you write think about the ways to sell it to soft sell these concepts to people that bring them in and make it really live to themselves as well and with that I will leave it to any questions and comments and gratuities that you have thank you I love this without the awkward body contact I'm not a big hugger I just have to share this example we're at Old Miss in Oxford oh no I'm sorry this was in Tuscaloosa we gave a tip to somebody over a 20% tip on our bill and the waitress came back and hugged my wife she was so appreciative of it and there was a restaurant that I visited at Chapman University last year and we gave a very nice tip we came back this year to the same restaurant I hadn't been there for 364 days the waitress remembered me and then he gave us a spectacular experience so hopefully you enjoyed this presentation I welcome your questions and comments so I'm going to start with we'll play the devil's advocate for a moment I hate to think about it I didn't realize it was going to be your great uncertainty and things that I wanted to take so in this it seems that choice analysis of these types of things the norm exists so therefore I'm going to find a number of reasons why it's rational but that's not really my question is how do you think that maybe you're looking at the history of how tipping arose versus why there is an absence of tipping in most companies I would like to see this sort of flush I think it's great have you looked at sort of flushing it out I'm in the process of doing that you have three observations there I'm going to work my way backwards the history of it is really interesting there is one academic paper on the history of tipping that is based on a book about cultural anthropologists has written on tipping Seagrave I think Kerry Seagrave wonderful book it's really interesting the history is kind of murky it dates back to the late medieval primarily in Britain as a way to compensate valets the informal thing is to ensure prompt service that seems kind of colloquium way we come up with the word tips I don't know if it's true or not nobody really does you start to see it mentioned more in the 1600s and 1700s it makes its way over to the United States and I don't I just had these extra charts back here but this is a chart of where they tip so if you go to Europe you need to print out this card for yourself because it will help alleviate uncertainty but it says here for restaurants in the United States it's usually 15 to 18% in Canada it's the same too it's interesting if you look at these places Brazil has some tipping but most of the places where Britain has been influenced so India there's also a 15 to 18% tipping norm Australia as well China does not have one you have to get closer and read these they just pick out certain countries Egypt I think it's like a 5% there's some British influence there so you can see in terms of where this thing goes I think it's a great anybody who has some scholarly interest in this I think it's something down the history of tipping or trying to explain the variance of maybe where British colonies went or something like that would be fascinating study and I think we need to absolutely do that kind of thing to flesh out this problem more in terms of this in terms of your question that could this possibly be ex post facto reasoning yeah I think it could you have some kind of quirky behavior and you ex post facto reason backwards to that who takes econ into a lot of different areas is kind of susceptible to those kind of things I've worked in the realm of the economics of religion and you know people say you're just ex post facto reasoning yeah possibly but there might be an interesting story here so put it on the table and are there different hypotheses and implications that we can draw that would try to minimize or mitigate that ex post facto so I ain't done with this yet so still working on it and then the last thing you mentioned about the ease or your unease with tipping do I tip here do I not tip here you know again print out this card it helps a lot it's interesting in Seattle we get a lot of tourists from Korea and from China and other places where tipping is not the norm and in the touristy restaurants there's clear communication say hi if you're visiting please know that you know we add your you know we typically give 15 or 18 percent here's a little tip chart or you go on your iPhone to figure out what the tipping is to mitigate the uncertainty so the uncertainty is still there cultural institutions I think help solve some problems I never say solve actually I'll take that back cultural institutions help to mitigate problems they never solve them entirely but interesting observations there anybody else yes sir I have two questions so one at some restaurant you go to you go to certain side of a party you go and say hey evil tipping it says we are automatically adding a 20 percent tip you can talk about that your framework also sort of I guess building on what Dr. Swarno said with the history something I've noticed is that at least when I talk it seems like tipping back in the day so when I talk to my grandparent it was sort of like you get a tip when you do a really good job so it's like the tip is not like a regular effort like okay the waitress or waiter brought my food or the bartender got me my drink they really went above and beyond so it's like A plus kind of and that's why I feel especially sort of with going out with my grandparents or older people they sometimes can be stingier with tipping because it's like oh they just did a regular job they didn't do above and beyond especially with younger people or say with my parents it's like they did what they were supposed to do so they get the tip like the standard tip I don't know if that's built in somewhere culturally over time tipping became less of you did a really great job to okay you didn't spend my food or it didn't 20 minutes to get my to get my meal I don't know if that has factored anything excellent question I kind of foreshadowed some of your concern over that with the self-serve yogurt stand that has the tipping jar I mean whiskey tango foxtrot there right the first time I saw that says you didn't do anything for me let me explain the principal agent problem to you you know I did I threw in like extra change that you know there's like 15 cents but yeah these things you know creep over time the norms change right there's there's potential research that could be done here on how these norms spread and get stretched and expand things right at first was maybe only 5% then it got up to 10 I used to I was inculcated into belief that was 15% but it's now it's typically 18 to maybe 20% that might be technology it's just easier now with an iPhone to calculate 18% tip whereas previously you know in some states the the tax was you know 8% so you just double the tax right as a quick rule of thumb but as things start to get more complicated technological shifts could stretch our use of the norm I don't know that's a potential hypothesis to investigate does it apply in other areas we used to give A's to students in classes when they did a good job boy do we give a lot of A's now they're all super smart now right they're just something in the water I think or something so you know again that you know we see this in our own teaching behavior how we've changed over I've been at this game now 23-24 years at the University of Washington so I've noticed I've changed things how does that do it it's kind of self-reflective in terms of that great study you want to study some of that contact me we'll do some work on that because I think that's an area where more people could be writing and researching and that kind of stuff as for large parties you just made my case that how wonderful this is is a pedagogical tool because most students do that say yeah whenever I go out with all my teenage friends and there's 10 of us they always you know put the tip on what's the deal I go well let's talk collective action problems right you know 10 10 people you're trying to solve and everybody can says well I'll just you know my friend next meal give a little bit more so I can give a little bit less right so you see a little bit of self-interested behavior there it might just be miscommunications or misinformation you're not sure what you actually paid and how much you owe and that kind of thing and I know from working in a restaurant whenever we saw teenagers you automatically threw that tip on there and you warned them in advance that that's going to happen because otherwise no waitress or waiter wanted to take that table because you knew that teenagers would not tip very well and then if word gets around that says oh you know nobody's serving the teens will you lose the teens clientele so you kind of it's a for me it's a pathway to talk about collective action problems which is really kind of cool another hour on that stuff for the students other questions sir from the point you're using today the restaurant I want to try to figure out what are you doing only so there's a pretty rich amount of like a probably good thing and there's usually a way of saying like commission so in terms of the public it's probably going off if you have a feature you're served by several servers then it goes all of them before you share that right so the individual signals that you're arguing get much weaker right if you share it between all the staff or the staff doing that table stuff so like from a consumer point of view the signal doesn't reach so for the efficient way it's like the same problem that the efficient way is that it only works if nobody else is doing it in so far and everybody expects me to get 50% and I don't get 50% and I don't get the benefit that you're saying extra service or whatever I always have to get at least 50% if I get extra service now I get 80% and when everybody's doing 20 I get 25% so it only works if nobody else is doing it third question the commission if this is true for the physical agent relation are we not using wage contracts for when they have any wage at all actually questions let me take those in reverse for commissions you know I hadn't really thought about this until you just mentioned it now but yeah commissions are another way of solving that principal agent problem for realtors and for car dealers and things where they're selling kind of big kind of things like that some Nordstroms I think uses commissions why couldn't we do this in a restaurant I'm not sure that's a great question to investigate my initial thing my initial reaction would be that okay let's imagine a world where we do commissions at a restaurant and I bring in 10 wait staff members and we have 100 tables let's say make the math easy well obviously everybody should kind of do 10 tables on average well who's going to get the first table there's going to be some conflict over that maybe we could create a rotating thing based upon seniority that you know I've been around the longest so the first person that comes in gets that table but then you know as different people come in there's different types of customers and trust me I've talked to a lot of waiters waitresses I've you know my own personal experience you know when somebody comes in there's a higher propensity they're going to be a bad tipper right you don't want that table so you're not going to take that table you want somebody else to take that table but they know that too so they're not going to want to take that table so it creates a lot of conflict amongst the servers and could potentially lower the ambiance of the plate because all the wait staff are arguing in the back whether or not they're going to take you because people in Cowboy hats don't tip for you know right and then I kind of so you know the idea is that you divide a restaurant up into 10 zones right you know and you know you get table A5 tonight and things like this and then they try to seat you know the the maitre d tries to seat the people evenly so everybody kind of eats the wait staff so it might be that I don't know that's one possible hypothesis worth investigating the efficiency wage theory tip creep it only works if other people are doing is a brilliant thing which might help to explain you know why our tips getting higher right is that it used to be 5% well if everybody does 5% then it's just kind of expected so how am I going to guarantee future service well I need to go to 8% and then somebody said well I need to go to 10% and you know I'm up I'm up to you know 20-25% at my tavern where I get really good service right so maybe I'm forcing other people to come up to me it's interesting because so many people just automatically assume 15% irrespective of the quality of service I think the incentive or the signal is not so much to reward the good service but to punish really bad service that you don't leave a tip at all if the service is really bad so I think the mechanism works in reverse you're expecting 15% but you might only get 10 or nothing and there's actually I don't know how many people know this I've learned this stuff I've been stunning this over the past year so when you go to a tavern and you get a beer the typical norm is to leave a dollar if you get a beer if it's a three or four dollar beer you leave a dollar and that provides really poor signal if you're always just automatically doing it without thinking but there's this thing you take an additional penny you put it heads up if you thought the service was good or tails up if you thought was bad to communicate so there's this additional signal I didn't know and some of the bartenders I know had to tell me about that that's kind of interesting right so yeah another interesting way to explore this kind of stuff the public goods thing what was the public goods for me when you mention public goods my mind went to the cultural norm right because that's the real public good here and and for me you know I still haven't wrapped my brain how do we create these kind of cultural norms that help to spur trust in a society that relies upon anonymous trade there is a big collective action problem there public goods problem how do we do this I don't know I'm still kind of foggy on that but is that what you meant by that oh yes I want to do a study on this and this suggests a really nice empirical study because some restaurants all the the wait staff pools their tips into a big fish bowl at the end of the night and they divide them equally my the implications there is that the service should be crappier there if you get to keep you know you become the sole residual claimant of what you work on that table the service will be much better so there's a hypothesis that we could eventually go on test and ask interestingly enough some places actually take their tips and share them with the the bus boys and the cooks and things like that I know this because my son has a paid internship at the Duval Tavern right now and he came home one night and he gets paid because of Washington wage laws he gets paid a higher wage than he's worth I've told him that and he's like dad because eventually you'll get there but you've been working there for two weeks you're kind of a clawed lovable one I love you son if you're watching um he's a good kid but he says oh I got you know I came back with $50 in tips this week I'm like what you go back go back and give those back to the wait staff and bartenders you know I I kind of thought about this is I'm wondering if there's some tip-sharing that goes on as a way of solving a principal agent problem between the serving staff and the cooks right because especially if it's a pretty busy restaurant you want the cook to be pleased with you because you say oh I got a rush order I need to get these out for these people that are on their way to the theater could you quit make those hamburgers really good right you need to have that cook on your side because if they didn't like you they say screw you over and they take a long time to do that but if you share your tips with them say oh yeah Tony is really good to me at the end I'll quick move this order up in the queue potential ideas there but you see again the beautiful pedagogical aspect of this it leads to so many different questions you can start hypothesizing and say okay let's do an empirical study on this I think it could be done but thank you folks I'll stick around for any additional questions or anything like that so appreciate it