Tipping, and Charitable Giving
Economists do not have a good theory of tipping. Normally, we assume that consumers pay as little as they have to when buying the products they want. Yet, when buying meals, haircuts, the services of porters, and taxi services, most consumers voluntarily pay more than they are legally required. Why does this happen? Why is it more true for some services than for others? Why do tipping customs vary from country to country? I have no idea (Harvard University Economist Greg Mankiw, quoted in Altman, 2012, loc 3838).
Sorry, Greg, you obviously are using Single Interest Theory (SIT) in a Microeconomics framing of the matter (used in Neoclassical Economics by the NeoClassEcon). To make sense of tipping, it works far better to use Dual Interest Theory (DIT) in Metaeconomics framing (used by the MetaEcon). Why? Well, DIT recognizes the shared Other-interest, not just the Self-interest. Metaeconomics sees both Self-interest&Other-interest at work in every choice So, Metaeconomics easily explains tipping, as well as charitable giving, too. It arises out of the Empathy based formation of a shared Other (internal within Own-self; it is about what is internal to each person)-interest with waitresses, people who cut hair, porters and taxi drivers in making the transaction more enjoyable and productive for both parties, and, in the case of charitable given, identification with the shared cause of that entity. We project ourselves into the situation of said persons, i.e. we Empathize, and that is where the tip (and charitable giving) arises. Easy. It is still all about Own-self, a balanced Self: We maximize our Own-interest, not our Self-interest.
The norm of tipping (and donations, giving of any kind) is represented on the Other-interest path 0M of Figure Giving 1, affecting the relative actual Price P paid (including Tip), as influenced by the Value V in Figure Giving 2. The percentage of the tip (or donation, giving) is represented in alternative paths 0Z in Figure Giving 1, all of which move us away from the Selfish path 0G.
In Metaeconomics, tipping is also very much a rational choice, in contrast to an irrational choice as required in Microeconomics framing. Tipping is about sacrificing a bit in the domain of Self-interest while making gains in the domain of Other-interest, all achieved at a satisfactory (satisficing) point on path 0Z, perhaps even a point of maximum Own-interest such as point B in Giving 1 as influenced by point B (the Right Thing to Do) from point B (it has Value beyond Price) in Giving 2. New idea, Greg: Metaeconomics easily explains tipping, as well as giving of all other kinds, and puts us in a position to empirically ask why tipping varies among and across places, including across countries, focusing on the role played by Empathy.
Much like tipping, Metaeconomics can also easily explain charitable giving. As Altman (2012, loc 3880) notes, there is over $200B in charitable giving each year in the US alone, all of it considered irrational behavior on NeoClassEcon framing. In particular, the Empathy based norm represented in the shared Other-interest in outcomes from such giving evolves on path 0M in Giving 1, again, as influenced by the Right Thing to Do from Giving 2. The Ego based Self-interest in not giving to charities is represented on the Ego based path 0G. Actual giving evolves somewhere between the two paths, on some path 0Z, with considerable variability on how much each person (which path 0Z) donates. Also, again, you are with me now, right?
Giving involves sacrifice in both domains of interest. Not going completely over to path 0M means being not totally Selfless, produces less payoff in shared Other-interest Some sacrifice in Self-interest, as one moves away from path 0G toward 0M, means not being totally Selfish. We arrive at a satisfactory point on a path 0Z, and perhaps even maximize Own-interest at point B. Maximizing Own-interest means giving a bit in both of the other domains of interest: Balance in life?
Overall, any economic choice influenced by norms and values (the shared Other-interest) is easily explained in Metaeconomics. It just needs to be recognized that norms and values arise out of Empathy, and are expressed in sets of shared Other-interest indifference curves in the decision space defined in economic framing. As Altman (2012, loc 3801) notes:
…conventional (read Micro) economics assumes that whether you place a human being in the United States, Canada, Mexico, Brazil, China, India, Japan, France, Germany, Italy, Greece, Turkey, New Zealand, Australia, Israel, Iran, Afghanistan, Sudan, Somalia, South Africa, Samoa, or the Cook Islands, that person’s preferences and choices would be the same (Altman, 2012, loc 3801).
Metaeconomics proposes a quite different framework, opening the possibility that the norms and values, and culture in general that would vary in each of the countries in the Altman list, each Country having its own set of Other-interest. Said variation of shared Other-interest would indeed influence Self-interest in each quite differently. The person in each of the countries could have widely different preferences and make quite different choices, dependent upon the nature of the operant Other-interest. Also, to reemphasize: Acting on Norms and Values shared with others outside the person is very much a rational act: Choosing a balanced point on path 0Z is rational.
In fact, maximizing either Self-interest or Other-interest, only, is what is irrational! Sorry, Neoclassical Economics based Microeconomists: Sorry, Greg. You are encouraging people to choose irrational points, to make irrational choices.
Altman, M. Behavioral Economics for Dummies. Mississauga, ON: John Wiley and Sons Canada, Ltd., Kindle, 2012.