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In Defense of Tipping, Part I: Principal-Agent Problems

Anthony Gill

American Institute for Economic Research, 2023

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Good service is good business all around, and so tipping can be useful in certain places, like restaurants, where service can vary. But now gratuities extend to areas in which no service exists, making the tips seem undeserved and the recipients, greedy. In this scholarly essay, professor Anthony Gill reveals tipping’s relationship to the principal–agent economic problem, in which one party – such as a restaurateur – depends on the work of an agent – a food server. Gill’s research will prove handy the next time you drop change into a jar at your coffee shop.

Summary

Tipping stirs debate among customers.

The practice of tipping has its proponents and detractors. The former argue that it motivates good service; the latter find it to be extortionate and, at times, misapplied in certain contexts. Many deem the extension of the practice to the digital realm of payment services awkward or inappropriate.

Some restaurant luminaries had even proposed a “living wage” for restaurant workers to replace gratuities and address the tipping controversy, but the movement failed.

Tipping appears to be the most effective means of addressing the principal–agent problem.

The principal–agent issue is a cornerstone of microeconomics. An individual, the principal, hires someone else, the agent, to complete a job. Workers may have less motivation to work efficiently if the principal pays them hourly...

About the Author

Anthony Gill is professor of political economy at the University of Washington.

In Defense of Tipping, Part I: Principal-Agent Problems

Read or listen offline

Editorial Rating

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Summary

Tipping stirs debate among customers.

Tipping appears to be the most effective means of addressing the principal–agent problem.

About the Author

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