Richard posner in ‘The economic analysis of law’ stated the following about contracts –“If I go to a store to buy a pound of rock salt, and I’m willing to pay legal tender for the salt and the store owner is willing to accept my legal tender in exchange, then one can confidently assume that the sale was worth more to me than the money and the money was worth more to the store owner than the salt. But it is easy to alter the situation and state that if I pay the owner $1 for the salt for a next day delivery, and the he fails to deliver and breaches the contract because his delivery men go on strike. Thus the true nature of contracts of law is to minimize breakdowns like above in the process of exchange. “
The above example makes it clear that for transactions where tangible goods are being exchanged, legal contracts make sense and are efficient. But when services are introduced, contracts are no longer efficient and involve a costly process in the drafting stage which make it less worthwhile. It is typically the ambiguities in the process that make it less worthwhile; for example, while delivering a haircut, it would be impossible to state the exact terms of the haircut and how many hairs would exactly be cut, at what speed etc, and no matter how granular the details are, the parties are bound to be dissatisfied and the litigation fees is bound to be costly.
Thus tipping, is one way of a service based transaction to account for transaction and contract cost. With a contract, no tipping is necessary since the contract would build such a thing in. Without a contract, both parties in a service based transaction agree to pay the fee for the service and a tip on top of that based on the buyers level of satisfaction.
As a substitution for a contract, the tip is extremely efficient and serves an important allocation efficiency purpose, since tipping, unlike anything else, is based on the social sanctions of guilt and embarrassment, but still has an important characteristic, which is penalty for breach.
If the service delivered is not what the customer felt he was paying for, he simply pays a smaller tip as a ‘ counter-party settlement’ and no other legal actions are needed. This could of course be taken to the extreme levels and a serving waiter might get ‘stiffed’ if the service is really poor. But for the most parts, if the waiter is paid a reasonable amount(which he feels is appropriate), there is likely to be no further action on his part.
(To be continued next week...)
Sources:
Mankiw
William Scott
NYU
Sources:
Mankiw
William Scott
NYU
