Tipping

New Zealand has an excellent non-tipping equilibrium, but there's been some discussion of encouraging a shift to tipping. A lot of restaurants do kinda have it, mostly (I think) as a way of securing rents from foreign tourists who don't know better.

But most of the discussion around tipping has the base economics of the thing wrong. The main point of tipping is to solve an information asymmetry problem.

Suppose you own a restaurant and simply have no way of telling which of your wait staff are decent with the customers and which are terrible. In that state of the world, you pay them a low hourly wage and encourage the customers to top it up based on the quality of service. Ideally this means that bad wait staff get no tips and exit the industry, average service gets an average overall wage inclusive of tips, and excellent staff are appropriately compensated.

In practice, shame constrains customers against leaving meagre tips for poor service, and tipping makes splitting bills among groups a hassle. And is it really that hard for a restaurant owner to tell whether the wait staff are doing their jobs properly?

Also worth noting is that service staff in roles with tipping have lower minimum wages in the US. Wages plus tips in total have to equal the minimum wage in some states; others just have a really low minimum wage for tipped staff. New Zealand's minimum wage is already very high relative to prevailing wages, and restaurant meals here are not cheap. Combining a high minimum wage with a shift to a tipping norm would have effects on overall demand for restaurant meals.

Finally, and from a more Eric-preferences perspective, it's just really really nice to have the staffing costs bundled into the price of everything and not have to carry a wad of small bills around to pay the same amount for your meal at the end of the night. And I don't particularly like what tipping does to service in the US - because I'm idiosyncratic. On average, people give higher tips where the server is chatty and, if the server is female, touches the customers. I don't like any of that.

Previously: Tipping and inflation incidence

(Food) Truckin'

Reader Donald emails, on Wellington Food trucks:

Cafe owners in Mirimar are upset over the intrusion of food trucks on "their patch".

So, of course, they want their privilege entrenched.

Are the predators exploiting loopholes to steal livelihood from the cafe owners? Mostly no with a little bit of yes.

For a start food truck proprietors have to play by the same food safety rules as anyone else which means they pay the same fees to their local council as the cafe owners. They have to have the same equipment and fittings (depending on their products) and, in some cases, they actually have to have an unseen "home base" for food preparation and storage that is also registered etc. Some jurisdictions also require mobile operators to pay for an extra mobile traders licence on top of food premises registration. So the legal environment is identical for both groups.

The main overhead item that differs is rent. Of course you have to factor in that food truck operators buy their trucks outright. A truck that complies with food safety regulations and has the necessary equipment in it will still start at $50K and still require all the normal operating costs. But that is nothing compared to what cafe owners are paying in monthly leases. So we get back to the meta-problem: property prices. My experience of the industry (retailing at a market and supplying cafes) suggests that high lease costs force cafe owners into a business model that they would not necessarily choose. Generally they have to generate a lot of revenue just to pay to be the lease. This usually means 7 day operation which means lots of staff and all the hassles that involves. Even then there's not much profit to be made. Cafes tend to go for the safe options in terms of food offerings; they have to sit under the bell curve to ensure the revenue to pay the lease etc.

So although some food trucks will just serve coffee and sandwiches others can afford to try something specialised and drive to the pockets of the market that prefer Peruvian deep-fried guinea-pig to a ham sandwich. And the truck operators can make a living without working 7 days a week or having the hassle of employing staff.

The $1,000 permit for outdoor seating is the interesting statement. This "permit" will be one or more of three things. It may be a "licence to occupy" which is between the business and the Roading department of the council for occupying part of their street. More likely it is a resource consent (issued by Planning) for undertaking an activity in a public space. What really complicates matters is if the cafes have a liquor licence (issued by Environmental Services) as well in which case the confusalator is turned up to 11. Food trucks will never, ever get a liquor licence so that is out of the equation but many (most?) cafes do. And what is not clear from this story is where the trucks are parking and setting up their tables. If it is a private parking area then the permit/consent may be moot anyway.

Actually, operating a food truck is not a great job. Remember this is Wellington we are talking about: the weather can be atrocious and custom fickle. But they survive because they can deliver some things to their customers that static cafes generally can't. But if the regulatory environment and cost structures were more friendly to cafes food trucks might quietly disappear.

If the food trucks really are eating standing restaurants' lunches, rents in truck-friendly locales should be dropping relative to spots that aren't convenient for food trucks. Do we have any evidence on it? Do restaurants ultimately bear the incidence here, or owners of land in truck-convenient locations?

The RNZ story is here. Neat Places' listing of some Wellington food trucks is here. Here's the story of one of them. Here's the story of another.

Information failure?

Last week's column for Insights argued against Obama's new regulations mandating calorie counts on standard menu items at large chains. A snippet:

The costs of mandatory calorie counts are pretty obvious. In addition to the usual labelling costs, they also make menus a lot more rigid. For places like McDonald’s, it’s pretty easy.

Standard menu items across thousands of locations make it easy to spread the fixed costs of assessing calorie counts and changing the menus. But what about smaller chains that like to encourage their chefs in a bit of experimentation? Trying out new dishes gets a lot harder if you then have to run a nutritional analysis on each one before serving.

And it isn’t just restaurants: a scoop of ice cream at the dairy counts too, if the dairy is part of a chain of 20 or more; movie-theatre popcorn also counts.

It’s always possible that, despite the costs, the information is sufficiently valuable to consumers that the policy makes sense. But there are two pretty big problems.

First, if customers really wanted calorie counts, they’d already have them. Restaurants are highly competitive: they run on thin margins and have to work really hard to draw customers. Most restaurants offer well-labelled options catering to vegetarian or gluten-sensitive customers, helping them to make choices. And some restaurants, like Subway, provide calorie counts.

Second, if customers really found the information valuable, it would show up in changes in the choices they make when presented with calorie information. Instead, field experiments show consumers don’t change their behaviour.

I hope that when people predictably ignore the calorie counts, the government won’t move from labelling nudges to harsher shoves; I also hope New Zealand remains outside of this particular asylum.

A correspondent suggests that I've missed the information market failure that could have motivated the regulations, and suggests that, since OIRA requires cost-benefit assessment, the policy is likely fine. Since we've had a bit of back and forth on it, I thought I'd post my reply here in case others might wish to see it.

There can be an information-failure case for public education campaigns explaining how calories work, what recommended daily calorie limits are, and how extra calories turn into fat. So generalised ad campaigns like “Did you know that eating 10% more than the daily recommended calorie intake will make you x kg heavier by the end of the year?” – I can see a case for that. And if that then has consumers asking restaurants for more calorie information, that’s all fine.

But I remain entirely unconvinced that there exists any real market failure in restaurant information provision to customers. The FDA’s case here is really weak.

In the FDA’s cost-benefit assessment, they note that restaurants are highly competitive, they have to respond to consumer needs, and that if customers really valued nutritional information, restaurants would provide it. I agree entirely. Then this:

“Notwithstanding this point, and although many of the usual market failures that justify regulatory action, such as the existence of market power or public goods, cannot be found here, the primary support for government intervention is an absence of sufficient nutritional information, produced by an inadequate incentive for restaurants to produce that information on their own. An absence of adequate information is of course a standard market failure, justifying disclosure requirements or provision of information in many contexts.”

This isn’t a market failure case; it’s a merit-goods argument! People aren’t demanding as much information as FDA would like (as restaurants would be providing it if customers did want it), therefore market failure? That just doesn’t hold.

They try to hang the whole thing on consumer time preferences being too high at point of sale (discounting future health costs) and argue that presenting the information would increase its salience and promote informed choice.

In the absence of market failure, it’s a lot harder to run the cost-benefit assessment. We can’t presume that consumers find the information valuable, either in gross or net terms. It isn’t at all inconceivable that some consumers in some circumstances have a preference for not being presented with calorie information, like when going out to a fancy dessert place for a celebration. Neither can we conclude from consequent changes in behaviour that the information was valuable, though I think we can conclude that, in the absence of any change, the information likely wasn’t valuable.

When the FDA runs the numbers, the cost-benefit assessment proceeds as though there are nothing but benefits from consumers’ having changed behaviour consequent to seeing the information: otherwise, they’d count some lost consumer surplus against health benefits to get a net. The only tallied costs are costs falling on firms for compliance; there’s no estimation of reduced consumer surplus from menu items that cease to exist because of labelling hassles. On the benefits side, they don’t even try to calculate it – they just say that the policy pays for itself easily if a small fraction of the obese cut their consumption by 100 calories per week. There is no real cost-benefit analysis anywhere in here. Meanwhile, the grocery council estimates that costs on them alone (since they also fall under the regs) would be a billion up front – double FDA’s estimate for the entire regulation. Sure, the grocery council will have had incentive to overestimate compliance costs, but the FDA’s assessment of $1,100 per covered establishment seems really low relative to the constantly-changing menus at grocery delis.

This isn’t so much an ideological point as a methodological one, though I suppose you could say the two link up. When we overturn voluntary consumer decisions in the absence of real market failures other than assumed “they’re not weighting the future enough” and without the ability to see into consumers’ utility functions, any cost-benefit assessment is fraught with difficulty. We can’t just assume information-based market failures where consumers don’t demand the information, and where there are plenty of existing ways for consumers to get the information if they want it. Heck, Samsung provides a free calorie-estimator app as part of the S5’s bundle, and plenty of other free ones already exist.

I really need a convincing story here explaining the market failure and justifying the mandatory provision of information that consumers might not find to be worth its cost. FDA really just points to the potential reductions in obesity and says that any trivial reduction would be sufficient to cover their estimate of the costs of the regulation; where those benefits are borne by individuals who could, right now, choose either to run a calorie-counting app or to frequent restaurants providing calorie information, and who are not doing so, I’m pretty sceptical. If there were some complementary market failure in the restaurant sector – say high barriers to entry and lack of competition, I could start seeing how it works. But that isn’t the restaurant sector. The story requires some fundamental underlying assumption of consumer stupidity or irrationality: I think it’s the kind of policy suitable for those inside the asylum, not those outside of it.

For those interested, here are the FDA's analysis and the OIRA statement.

Me-utilitarianism: restaurant edition

If this story's right, the country now has a couple hundred fresh-off-the-boat Chinese chefs who haven't yet learned to adapt their offerings for the Kiwi palette.

Where are they? I want the list of restaurants! There are excellent Chinese restaurants in NZ (and Asian restaurants more generally), but if any foodies have heard anything about particularly good new chefs having turned up in Christchurch, I'd love to hear about it.

The National Distribution Union's upset about the whole thing, and especially by that some chefs might be taking salary offers including room and board that have cash components less than minimum wage.

I'm upset that we don't have a free trade agreement with Ethiopia bringing in a few dozen good Ethiopean chefs.

Crowdfunding the kitchen

Back in May, I pointed to Conflict Kitchen in Pittsburgh. As much performance art project as restaurant, they brought Iranian food to Yinzers.

Their next iteration will serve Afghan food (oh how I miss Panshir). They're raising funds for it using Kickstarter - a conditional donation system where donors aren't on the hook unless the project gets enough support. From The Economist:

As crowdfunding has matured from a series of one-off efforts into something reproducible, the money has followed. Millions of dollars, in increments as small as $5, have poured into efforts that connect artists, musicians, writers and others with people willing to fund their projects. Venture capitalists have also shown an interest by investing in start-ups that facilitate crowdfunding.

There have of course been “tip jars” on web pages for years, and even big sites like Wikipedia ask for donations. But this approach works for a vanishingly small number of sites, and then only in conjunction with other sources of revenue. Crowdfunding is different, say its advocates. “It’s not a tip jar, and that’s what makes it sustainable,” says Perry Chen, the boss of Kickstarter, the largest of several start-ups that act as matchmakers between donors and projects.

...

Crowdfunding has benefited from the rise of social networking, which allows even non-celebrities to accumulate large numbers of fans or followers online, to whom they can reach out when a project needs funding. Successful projects, says Mr Chen, usually require an “anchor audience” of friends or fans who engage in “micropatronage”, enjoying the association with a successful project and a personal link with an artist or writer.

...

Crowdfunding may turn out to be a fad, says Cory Doctorow, a bestselling novelist and blogger who is experimenting with various forms of micropatronage, including selling a bespoke short story for $10,000 to one of his fans. “There will be some people for whom the fact that they raise money for themselves will be a marketing story,” he says. But crowdfunding’s early success at raising sums large enough to be useful, though not large enough to replace other sources of funding for creative works, fits in with a broader trend of using technology to bring artists and their audiences closer together. As Mr Chen notes, artists can now ask their audiences directly for support, and will often get it. “People are thrilled to be involved in the creative process and see something come to life,” he says.

Conflict Kitchen is looking for $4,000. The micropayments scheme follows Masnick's "Connect with fans - Reason to Buy" formula: even small donors can feel useful if their donations were critical in getting to the $4000 threshold that would draw in the other donors' pledges; larger donors get affiliative goods ranging from food vouchers to a dinner, via Skype, with a dining partner in Tehran:

Your very own Skype meal with a dining partner in Iran. We will provide everything you need for a meal for yourself and a Kubideh Kitchen collaborator in Iran. You will receive a special kit including spice mix, recipes, directions for a three course feast, and contact information with your dinner partner in Tehran, who will prepare the same meal as you in their home and with whom you will share the meal (via Skype); AND 10 Kubideh Kitchen food wrappers for your guests.

Hard to bomb folks with whom you've dined.

Conflict Kitchen: Update

NPR covers Conflict Kitchen:

Conflict is defined as anything from armed dispute to embargos. The creators chose Iran because they knew people there — and Iranians in Pittsburgh.

Weleski says opening the restaurant added a layer of cultural diversity to the city — it's the only Iranian restaurant around. At the same time though, the Kitchen crew didn't want to alienate Pittsburghers.

"We wanted to chose a food that was sort of an everyman's food, a food that you would find on the streets of Tehran," she says. "And everyone understands a sandwich. It's something you can take with you, there’s a little girl running by right now, skipping and eating her kubidah sandwich at the same time and a lot of people have said they feel like it's a Persian hamburger."

The entire experience is meant to spark conversation. The Conflict Kitchen's colorful exterior boasts Farsi words. The sandwich comes in a wrapper covered with information and perspectives from interviews with Iranians on everything from film to nuclear power to the green movement.

...

In a few months, the grant-funded restaurant will switch countries — and cuisines. In September, it will serve food from Afghanistan. After that, maybe Venezuela or North Korea.

Odds they found out about the restaurant from Marginal Revolution, who found it here?

Awesome idea for a grant; I'd like to know more about who's funding it. I'd also be curious to know whether familiarity with a country's cuisine has any effect on individual views about that country - there's an obvious selection bias problem. You'd either need time series data on individuals' views along with their eating habits, or change in average views by zip code and the number of different restaurants that have opened in the zip code in the interval.

I'd suggest that a good way of testing this would be to think of some country about which most folks here in New Zealand have fairly neutral views - say, Ethiopia. Run a question in our GSS about views of Ethiopia. Then, pay people, ideally new migrant chefs from Ethiopia, to open Ethiopean restaurants in a few randomly chosen neighbourhoods. For statistical reasons I won't get into here, one of those should be somewhere along the New Brighton Mall near the pier. Don't tell anybody the restaurants are subsidized or that would contaminate the experiment. Then, see whether there have been changes in views over time that correlate with being near one of the randomly opened restaurants. The Marsden Fund has funded goofier things.

HT for the NPR story: @TheNBR, who previously reckoned blogs were parasitic on mainstream media for their stories. At least we bloggers tip our hats....

Restaurants in everything: Conflict Kitchen

Susan sends me this one:

Welcome to Conflict Kitchen’s first iteration, Kubideh Kitchen. Conflict Kitchen is a take-out restaurant that only serves cuisine from countries that the United States is in conflict with. The food is served out of a take-out style storefront, which will rotate identities every 4 months to highlight another country. Each Conflict Kitchen iteration will be augmented by events, performances, and discussion about the the culture, politics, and issues at stake with each county we focus on.

They're in Pittsburgh at the corner of Highland and Baum in East Liberty: about a five minute drive from Susan's old neighborhood.

Conflict Kitchen currently serves Iranian food. They run limited hours as an add-on to The Waffle Shop, which seems as much performance art event as restaurant.

If such a restaurant opened in New Zealand, I may be tempted to recommend that New Zealand declare war on Ethiopia, El Salvador, Peru, and Afghanistan for starters. I'm a pacifist, but I do have my limits. Those limits may be kitfo, yucca, and kadu palow.