A modeling framework for tipping in the presence of a social norm

Tipping is a complex phenomenon driven by social pressure, and cutting across various stakeholders – firms, customers, and workers. Analyzing the long-run impact of policies related to tipping is therefore challenging. To facilitate such analysis, we develop a modeling framework, in which a tipping norm is formed endogenously in a market comprised of a price-setting firm offering service to potential customers. Customers choose whether to consume the service or not, and if yes, how much to tip the server afterwards. With tipping, customers show reciprocity to the server by sharing a fraction of their surplus, but also undergo social pressure to comply with the prevailing norm of tipping. This tipping norm is shown to evolve endogenously through a dynamic process of sequential market adjustments over time: the average tip determines in each time period the tipping norm for the next period, causing the firm to adapt its price and customers to adapt their tips accordingly. We show that, in the short run (in between time periods), the average tip-to-price ratio increases, converging in the long run to a stable market-equilibrium outcome. Characterization of this equilibrium outcome allows us to derive qualitative results about the long-run impact of different exogenous factors on tipping: We find that the equilibrium tip-to-price ratio increases when customers are more sensitive to social pressure, when their feelings of eciprocity grow stronger, when their range of service valuations spreads out, or when they consider the service more valuable. Building on this framework, we further investigate several economic implications of tipping pertaining social welfare, labor cost, and service quality, thus, uncovering incentives and trade-offs to which the tipping mechanism give rise, from the firm’s, the worker’s, and the customer’s perspectives.

Joint with Laurens G. Debo.