Applying Game Theory to Restaurant Tipping Behavior: A Holistic Examination of the Service Exchange Relationship

The practice of tipping, voluntary payments made to service staff, has been called irrational, inequitable, and discriminatory but persists as the primary form of compensation in restaurants in the United States. The practice of tipping, voluntary payments made to service staff, has been called irrational, inequitable, and discriminatory but persists as the primary form of compensation in restaurants in the United States. Researchers have primarily focused on the customer side of the service exchange relationship to understand the salient factors in the dining experience that influence the tip amount. A gap exists concerning the tipped employee perspective (server) and what they believe influences a tip amount. Additionally, few studies have explored both the server and customer inputs into the relationship and the effect on the tip amount. This two-part study will address these gaps, and first will explore the server side of the relationship and then build a game-theoretic model to understand the interplay between server and customer that leads to a desirable tip amount. Study one utilizes one-on-one interviews with tipped restaurant employees (bartenders and servers) and content analysis to categorize the determinants of a tip amount and understand variables of interest from the server's perspective. The results show that determinants of a tip amount can be sorted into five overarching categories, each with several sub-factors: service quality, food quality, expertise, personal factors, and connection. This analysis determined that the server's personality was the most frequently cited influential factor in tip earnings. Additionally, several other key variables from the extant literature were explored, finding that servers believe a large party is eight or more people, a regular customer dines at least once per week in the restaurant, and a desirable tip amount is 18% or greater. Study two builds on the results of study one to build a game-theoretic model of the relationship between the server and customer. Game theory has been proposed as a potential heuristic in several previous studies regarding tipping behavior and is utilized here to show the holistic relationship between servers, customers, and the outcome, tip amount (Butler & Skipper, 1980; Lynn, 2015; Parrett, 2006; Were, Mirchio & Maranga, 2019). The customer's perspective was collected using a self-administered survey focused on eight key variables: service quality, food quality, group size, patronage frequency, bill amount, service recovery, payment method, and personality. The server's perspective was layered into the dating using cut-off values established in study one. Several game-theoretic models were created using a combination of all variables of interest, and AIC model selection was used to determine the one that best fits the data. The results found that the model with service quality, patronage frequency, and group size was the most parsimonious. Finally, logistic regression was run to determine the path through the game-theoretic model. Results show that when service quality is perceived as good, the customer is a regular (dines in the restaurant once per week or more) and dines with seven or fewer guests the tip will be desirable, specifically 18% or above. This study illustrates the importance of incorporating the perspectives of the individuals involved in a service exchange relationship to understand the outcomes holistically. According to tipped employees, this study found that personality is a key variable of interest and has been largely overlooked in the tipping literature. Furthermore, service quality, patron frequency, and group size are heavily debated in the extant literature on its influence on tip amounts. This study shows that these are the most important determinants of a tip amount when incorporating the server's perspective and fills a gap in the tipping literature. Future research should continue to explore tipping using the framework/methodology of this study and extend to other restaurant classifications and other compensation methods