Why do people pay tips: Economists answer

Why do people pay tips: Economists answer
Image by Oleksandr Pyrohov from Pixabay

For economists, tipping is an irrational behaviour of consumers: after all, the service is already paid, why pay extra? Factors influencing the willingness to tip helped clarify a large-scale study of tips for taxi drivers.

Phenomenon

Common in the service sector tips – a large-scale economic phenomenon: in the United States alone in 2013, more than $ 36 billion was paid to waiters and employees of other service industries in the form of “gratitude”, according to the Economic Policy Institute (EPI). This amount, comparable, for example, with the current capitalization of the Ford Motor Company ($ 34 billion at the end of October 2019), is actually higher, since not all tips are officially accounted for. For many service workers, these seemingly small amounts of money are the main source of income: for example, waiters in restaurants and bartenders earn almost two-thirds of their income (58% to 61%, respectively), said Ofer H. Azar and editor of the Journal of Behavioral and Experimental Economics, who studies the tipping phenomenon.

Why is it important

Information about who, how and why allows you to better understand the factors that affect the economic behaviour of consumers and the economy itself: an increasing number of jobs are provided by the sharing economy and the economy of platforms, and the number of their consumers is growing.

“Economists do not have a good theory for tips. As a rule, we assume that consumers spend no more than what is required to buy the goods they need. However, when paying for food, haircuts and taxi drivers, most people voluntarily pay more than necessary. Why is this happening? Why is it more true for some types of services than for others? Why are tips different in different countries? I have no idea, ” wrote Harvard professor Greg Manquue, author of popular textbooks on economics, in 2007. Indeed, if a tip is optional, and the service is already provided, the rational decision that the consumer must make is not to tip. However, people often do the opposite.

Study

Scientists from Stanford, the University of California and the University of Chicago have examined the tips left by Uber drivers. In the United States, in 2018, up to 43% of adults used mobile taxi calling apps. Daniel Danker, Uber’s top manager, said in mid-2019 that over the past two years, Uber drivers and Uber Eats couriers have received nearly $ 2 billion in gratitudes.

The authors themselves call the study unique: it covers more than 40 million trips to the United States after Uber provided an opportunity to encourage drivers to tip through its online platform. Previous studies were usually based on small amounts of data or on information received from tip recipients themselves. In addition, the authors of the Uber study were more interested in social and economic aspects: who pays tips, who exactly and why.

It turned out that most of the service customers (60%) never tipped, and only 1% always paid them. The rest tipped an average of one trip out of every four. Overall, approximately 16% of drivers received tips.

Tipping passengers paid an average of about $ 3 (26% of the cost of the trip) in excess of the invoice amount, on average for all trips (with and without tips) a modest $ 0.5 tip.

Who gets it

In addition to the quality of the trip itself, personal characteristics of drivers, in particular gender and age, are noticeably correlated with tips. Tips are more often paid by male passengers than women, and female drivers receive more tips than men. Young women drivers lead in earned tips. They tip about 10-12% more often than men, and the tip amount is on average 12% higher. However, the higher the age of drivers of both sexes, the less and less tips, as a result, the “gender difference” in tips completely disappears by the age of 65.

Strange as it may seem, the driver’s experience is negatively correlated with the tip: the more trips a driver makes, the less he gets a tip. As the researchers noted, this result may be due to the monotony of the taxi drivers: the more trips they make, the more indifferent they are to how satisfied the customers are, and the more often they think that tips are not worth the effort.

The data also showed that passengers pay more tips to familiar drivers: in the case of a repeated trip with the same taxi driver, the tip volume increased by 27% compared to the first, and in the case of the third – by 23% compared to the first and 7% compared to second.

Who pays

According to the authors of the study, there is a similarity between the behaviour of those who tip and those who participate in charity, where the individuality of donors is more important than the characteristics of the company receiving donations.

So, men tip drivers more often and more generously than women. Drivers received additional money from female passengers in 14.3% of trips, from men in 17% of trips, while the average amount from female clients was $ 3.07 versus $ 3.13 for men.

Regular customers leave a taxi less often than those who use the service from time to time. For example, those who made their first 15 trips tipped in a quarter of cases, and the amount of “gratitude” averaged $ 3.34; those who made 275 or more trips encouraged drivers in only 8.1% of cases, adding an average of $ 2.69 to the bill.

Causes

Endorsement by society is one of the main motives for tipping, pointed out by Professor Michael Lynn of Cornell University, an expert in tipping research. He identifies other motives: assistance to employees in the service sector, remuneration for the service provided, the desire to receive quality service in the future.

But the “tips” in the form of options for possible tip amounts (when at the end of the trip the application offers to tip the driver and shows several options for their size to choose from), as it turned out, they almost did not work: their introduction increased the tip by an average of 2.5%. These automatic clues are an attempt to encourage compliance with social norms, the researchers write. But it turns out that the strength of social pushing is seriously reduced if there is no one to check these standards because the passenger pressed the tip button or not, no one sees.

The History

The history of this custom also helps to understand the basic motivations of tipping. Initially, tips were given to encourage better service or to pay extra labour. Tipping comes from 16th century England, Ofer H. Azar writes. At that time, in English pubs and coffee houses, copper pots were placed on the table with the inscription To Insure Promptitude (“to guarantee speed”). In them, customers who wanted to be served quickly dropped coins. At the same time, the practice was widespread on the estates of aristocrats, according to which guests at house paid local servants for service and additional wor. In some cases, these associated costs were so high that friends of the hosts preferred to refuse the visit.

The custom to leave a tip quickly spread throughout Europe, and by the end of the 19th century, it reached the United States – influential Americans who travelled abroad began to encourage workers at home, showing that they were well acquainted with European traditions. Some states at the beginning of the 20th century tried to legally ban gratuities, but in the end, the practice took root: the business liked the tip because it was possible to save on the salaries of employees who received additional remuneration directly from the client. In the 1910s, more than 10% of workers in the United States received gratuities, their annual amount was $ 200-500 million. In some cases, service personnel in restaurants or beauty salons did not pay at all.

Gradually, tips turned into a social norm, and consumers began to feel obligated to “Gratitude” service workers, even against their own will, so as not to provoke public censure.

SOURCEEcon
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Amit Kumar
Amit Kumar is editor-in-chief and founder of Revyuh Media. He has been ensuring journalistic quality and shaping the future of Revyuh.com - in terms of content, text, personnel and strategy. He also develops herself further, likes to learn new things and, as a trained mediator, considers communication and freedom to be essential in editorial cooperation. After studying and training at the Indian Institute of Journalism & Mass Communication He accompanied an ambitious Internet portal into the Afterlife and was editor of the Scroll Lib Foundation. After that He did public relations for the MNC's in India. Email: amit.kumar (at) revyuh (dot) com ICE : 00 91 (0) 99580 61723

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