Why do people leave tips? According to new research, the answer comes down to two main motivations. Some customers tip to genuinely reward good service. Others tip because they feel pressure to follow social norms.
The difference matters. Customers who truly value the service often leave more than the customary amount. Those who are mainly motivated by social expectations tend to match whatever the average tip appears to be. Over time, this dynamic can steadily push tipping percentages higher in places where tipping is common.
A study published in Management Science by Dr. Ran Snitkovsky of the Coller School of Management at Tel Aviv University and Prof. Laurens Debo of the Tuck School of Business at Dartmouth College uses a theoretical model to better understand this behavior.
“Tipping is a phenomenon that is difficult to explain using classical economic tools,” explains Dr. Snitkovsky. “The ‘homo economicus’, who is only interested in their own material wealth, has no reason to tip once the service has been provided. In the past, researchers suggested that tipping ensures better service in the future, but this doesn’t explain why we tip even when we are quite certain that we will never encounter that specific service provider again. For example, we tip a taxi driver in New York, when there is practically no chance of encountering them again — and even if we did, they would probably not remember us. Another common argument is that tipping provides an incentive for servers to give better service. Whether this is true or not, a self-interested customer would prefer others to tip and maintain the good service quality while avoiding the expense himself. The conclusion is that to understand this phenomenon in depth, we must examine psychological and behavioral considerations.”
Tipping is big business. A recent study reported by USA Today found that the average American spends nearly $500 a year on tips at restaurants and bars. Altogether, tipping in the U.S. generates more than $50 billion annually and serves as a primary source of income for millions of workers.
Behavioral Economics and Game Theory Model
To dig deeper, the researchers built a mathematical model using tools from game theory and behavioral economics.
“We used a mathematical model and tools from game theory and behavioral economics to understand the motivations behind tipping,” says Dr. Snitkovsky. “Into this model we fed the two main reasons people report for tipping: the first is to express gratitude to the service provider, and the second is conformity — doing what everybody else does. The first reason relates to my personal valuation of the service I received or the server-customer interaction, and can stem from wanting to reward the server for doing their job or showing empathy towards them. The second reason is tied to how I perceive myself in society, i.e., my interaction with other customers. In other words, we can distinguish between ‘appreciators’ and ‘conformists.'”
Their findings suggest that in societies where social pressure is stronger, tipping averages rise over time. When people feel a stronger need to follow the crowd, they are more likely to match or exceed prevailing norms.
“The process is inherently driven by appreciators pulling the conformists upward, but not the other way around,” says Dr. Snitkovsky. “This might explain why tipping rates in the U.S. few decades ago were around 10% and are now closer to 20%. Those who appreciate the service are willing to tip well above the average, while those who wish to comply with the customary practice ‘chase’ the average. Additionally, rising tipping rates may also reflect growing economic inequality — a hypothesis proposed by another researcher from Tel Aviv University, Prof. Yoram Margalioth of the Buchmann Faculty of Law, and supported by our model.”
Does Tipping Actually Improve Service?
The team also examined whether tipping truly motivates better performance from servers. Their model indicates that while tips can encourage some extra effort, the effect is limited.
Because many customers tip based on social norms rather than service quality, servers often receive the standard percentage regardless of performance. That weakens the incentive.
“If a server knows most customers are conformists, there’s little reason to put in extra effort since they will tip the customary amount anyway. This is indeed the situation in countries like the U.S. In an imaginary world where all customers are appreciators, unaffected by each other’s tipping rates, tipping would serve as a much stronger incentive. On the other hand, in such a world where tips only reflect appreciation, businesses might conclude that customers are willing to pay more for the service experience and charge higher prices upfront. This may trigger customers to adjust their expectations and reduce the tip percentage accordingly.”
The Economics of Tip Credit Laws
The researchers also analyzed the ‘tip credit’ system used in most U.S. states. Under this policy, employers can pay tipped workers less than the standard minimum wage and count tips toward the difference. For example, if the minimum wage is $8 per hour and the tipped wage is set at $3, an employer may pay $3 directly and rely on tips to cover the remaining $5. If tips do not bring the worker up to $8 per hour, the employer must make up the shortfall. If tips push earnings above $8, the worker keeps the extra amount.
“We see that a higher tip credit allows businesses to reduce prices — because they rely more on tips to finance labor,” says Dr. Snitkovsky. “Consequently, they can increase supply and serve more customers. This suggests an element of economic efficiency, but the efficiency in this case comes at the expense of the individual server’s earnings. So essentially, tip credit is a mechanism allowing employers to cut into tips that ostensibly belong to servers, using them to pay wages.”
The Social Costs and Complexities of Tipping
Dr. Snitkovsky acknowledges that he approached the research with skepticism about tipping.
“I came to this study with a bias. Personally, I don’t like this practice, and I wanted to understand what drives it. First of all, tipping puts customers in an uncomfortable position. Studies have shown that tipping can encourage sexist behavior toward female servers — who may refrain from setting boundaries to avoid losing tips. Other studies demonstrate that people tend to tip more generously when a server is of their own ethnicity, introducing an element of racism. It’s easy to find good reasons to do away tipping, but the custom also has some positive effects, making it a complex phenomenon. Ultimately, tipping allows those willing to pay more for the service to do so, thereby subsidizing the service for others. That’s a positive aspect. Additionally, tips do seem to encourage servers to provide better service, even though this effect is very limited. In my opinion, in the 21st century business owners have better tools to assess server performance, such as online reviews and even in-house cameras.”
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