Teaching "Tips": An Economic and Pedagogical Defense of Gratuities

A few upscale restaurants in the United States recently have ended the practice of tipping their wait staff, preferring a fixed labor cost method of compensation. This attempt to change this long-standing cultural practice presents a fascinating opportunity to explore a variety of economic concepts including principal-agent problems, gains-from-trade, price discrimination, and cultural institutions designed to build trust.Professor Gill argues that tipping remains an economically efficient means of providing quality service wherein restaurant owners, wait staff, and customers all benefit in a win-win-win situation. Furthermore, the norm of tipping also provides an excellent example to teach basic economic principles and foster classroom discussion.Presented at the Mises Institute on 22 June 2017. Includes a Question-and-Answer period.