Tipping as a Pricing Signal

Abstract This paper proposes a menu-cost theory of tipping. When firms face costs of changing posted prices, voluntary tips provide a noisy but informative signal of whether current prices are “too low” or “too high.” The firm adjusts its price only when tip deviations exceed an information-dependent threshold, generating a time-varying inaction band. The framework explains why tipping is common in volatile, service-intensive industries but rare in standardized chains with rich alternative telemetry. Unlike existing models based on norms or reciprocity, this approach requires only that average tips increase weakly with perceived surplus for the consumers.