An Economic and Pedagogical Defense of Gratuities

Abstract

A few upscale restaurants in the United States recently have ended the practice of tipping their wait staff, preferring a fixed labor cost method of compensation. This attempt to change this long-standing cultural practice presents a fascinating opportunity to explore a variety of economic concepts including principal-agent problems, gains-from-trade, price discrimination, and cultural institutions designed to build trust. I argue that tipping remains an economically efficient means of providing quality service wherein restaurant owners, wait staff, and customers all benefit in what can be a win-win-win situation. The norm of tipping also provides an excellent example to teach basic economic principles and foster classroom discussion.