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Is Tipping Economically Relevant? Evidence from the Beauty Industry

Abstract

In this paper we demonstrate tips are sensitive to service quality even when future interaction is unlikely. Using a novel data set covering 150,000 hair salon appointments where customers can be observed over time, we are able to exploit variation in service quality and exogenous separation rates. This allows us to separate the dynamic and direct effect of service quality on tips. We show that an important part of tipping behavior is a social norm for quality: clients tip based on perceived quality even when they do not expect to see the stylist again. At the same time, dynamic concerns make tips more sensitive to quality. We show in a stylized dynamic model how such a social norm for quality can support greater effort provision in equilibrium. Our results support the view of tipping as an evolved custom that encourages cooperation.