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Tipping as risk sharing

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  • Holland, Steven J.

Abstract

Tipping is often dismissed as an exception to the assumption of rational economic agents. This paper describes situations where tipping is, in fact, an effective mechanism for risk sharing and welfare improvement. When risk-averse customers purchase a service with uncertain quality, tipping can reduce the customer's exposure to risk by making part of the price of the service discretionary. These findings help explain why we tend to tip restaurant workers but not retail workers and why some high-risk service providers, such as lawyers and automobile mechanics, are not typically tipped.

Suggested Citation

  • Holland, Steven J., 2009. "Tipping as risk sharing," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 641-647, August.
    • Handle: RePEc:eee:soceco:v:38:y:2009:i:4:p:641-647
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    References listed on IDEAS

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    1. Ofer H. Azar, 2007. "Do people tip strategically, to improve future service? Theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 515-527, May.
    2. Conlin, Michael & Lynn, Michael & O'Donoghue, Ted, 2003. "The norm of restaurant tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 297-321, November.
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    7. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-157, January.
    8. Azar, Ofer H., 2007. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 250-265, April.
    9. Ofer H. Azar & Yossi Tobol, 2008. "Tipping as a Strategic Investment in Service Quality: An Optimal-Control Analysis of Repeated Interactions in the Service Industry," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 246-260, July.
    10. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, John Wiley & Sons, vol. 71(1), pages 170-181, July.
    11. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    12. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    13. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, August.
    14. Lynn, Michael & Zinkhan, George M & Harris, Judy, 1993. "Consumer Tipping: A Cross-Country Study," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 20(3), pages 478-488, December.
    15. Lynn, Michael & McCall, Michael, 2000. "Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 29(2), pages 203-214.
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    Cited by:

    1. Lynn, Michael, 2016. "Why are we more likely to tip some service occupations than others? Theory, evidence, and implications," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 134-150.
    2. Lynn, Michael & Starbuck, Mark M., 2015. "Tipping customs: The effects of national differences in attitudes toward tipping and sensitivities to duty and social pressure," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 57(C), pages 158-166.

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