Free rider problems are everywhere. For example, some restaurants let every food server keep their own tips. Other restaurants require all of the food servers to put their tips into a tip pool, which then gets divided up equally among all of the servers. It’s easy to adjust the tip pool so that people who work more hours or serve more tables get their “fair share,” so that’s not the issue we’re concerned about here. Instead, let’s think about how the tip pool changes the server’s incentive to be nice to the customer.
a. To keep it simple, let’s assume that a server can be “nice” and earn $100 in tips per shift, or be “mean” and earn $40 in tips per shift. If an individual server goes from being “mean” to being “nice,” how much more will he earn in a non-tip-pooling world?
b. Now let’s look at incentives in a tip pool. If all the servers are mean, how much will the average server earn? If all the servers are nice, how much will the average server earn? What’s the change in tips per server if all of them switch from being mean to being nice?
c. But in the real world, of course, each server makes her own decision to be mean or nice. Suppose that some servers are being nice and others are being mean, and you’re trying to decide whether to be nice or mean. What’s the payoff to you if you switch your behavior? Does your answer depend on how many other servers are being nice?
d. So when are you most likely to be nice: When you’re in a tip pool or when you keep your own tips? If the restaurant cares a lot about keeping its customers happy, which policy will it follow?