During my first day in San Jose Costa Rica, I was eager to experience the local food, but I was not prepared for the dining service that accompanied it. When I went to the front counter prepared to pay my bill, I discovered 10% gratuity was mandatory; when I questioned the cashier about this policy she explained to me that it was a national law.
In the late 1860’s aristocrats from Europe began leaving gratuity or “tipping” for different services in America to boast their worldliness. The practice was quickly labeled “aristocratic” as citizens complained that the tip exemplified a lifestyle Americans left Europe to escape. In fact, at the beginning of the twentieth century, the Anti-Tipping Society of America had over 100 thousand members in Georgia alone. However, due to some 1st amendment issues and the high cost of enforcing anti-tipping policies, by 1926 all of the anti-tipping laws in the United States were repealed.
Today many restaurant customers still oppose the tip. They argue that tips are like paying someone twice for the same job or alternatively that they are degrading to the server. Of course those working in restaurants generally favor tips since they generally compose a large part of a server’s income. The government is indifferent as long as it is able to collect its tax.
Costa Rica has found a way to satisfy all parties via a mandated tipping law requiring each restaurant to include a 10% mandatory tip on each customer’s bill; customers do not leave any more or less than 10%. Costa Ricans are generally accepting of this law; after all, it seems to lower transactions costs. Consumers need not calculate tips, servers can count on a base wage and government officials can easily calculate the income tax servers need to pay. However, mandatory gratuity eliminates almost all of the benefits tips provide while simultaneously increasing costs for consumers and restaurant owners.
While in Costa Rica, I ate at a restaurant at least once per day and the service was terrible! When I was part of a group, our individual plates were never served at the same time. I never received a re-fill without request, nor was I ever asked about the quality of the food. In fact, making any kind of request from the wait staff took quite a bit of effort and ironically a rather aristocratic attitude.
It should be no surprise that service in this environment is poor. The mandatory tipping law prevents the mitigation of the biggest threat to excellent service; the principal agent problem. While restaurant owners obviously want their customers to have good service, waiters have little incentive to go the extra mile. Despite spending time and money on extensive employee training, restaurant owners cannot micromanaged every action of their wait staff to ensure quality. A system of voluntary tipping helps align the incentives of both waiters and restaurant owners because both are better off as the quality of the restaurant increases. However, once the tip becomes mandated and standardized at 10%, like in Costa Rica, the servers (agents) interests are no longer aligned with the restaurateur (principal) since working harder would not produce any benefit for them.
Of course, tipping increases competition among servers. However because a typical customer does not leave multiple tips for different servers, there is little reason to conclude that tips create tense relationships among servers in the same restaurant. Tips create competition among all servers in the industry. This competition leads to innovation- in other words servers have an incentive to find new ways to improve service. In fact, in an environment with voluntary tipping, servers have an incentive to sell desserts, appetizers, alcohol, and other products that help drive up a bill and thus the server’s tip. In other words, tips give servers an incentive to be good sales people, which lowers the transactions cost of improving a customer’s dining experience while benefitting both the server and restaurant owner.
Costa Rica and the United States were both culturally opposed to tipping in the past, however tipping has prevailed in the United States because it proves to be economically efficient: it creates value for all parties. Today those who leave large tips are not labeled aristocratic, perhaps in implicit recognition of the benefits of voluntary exchange. On the contrary, Costa Rica’s mandatory gratuity law, effectively eliminates all the benefits that tips creates while raising costs for all parties involved and limiting entrepreneurs capacity to create a system that is both culturally acceptable and efficient for everyone.