Free rider problems are everywhere. For example, some restaurants let each food server keep his or her 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. Let’s think about how the tip pool changes the server’s incentive to be nice to the customer.

a. 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 or she earn in a non-tip-pooling world?

Gains from being "nice": $

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?

Average mean server earnings:$

Average nice server earnings: $

What’s the change in tips per server if all of them switch from being mean to being nice?

Change in tips per server: $

c. But in the real world, of course, each server makes his or her own decision to be mean or nice. Suppose that you are on a shift with 9 other servers, and some servers are being nice and others are being mean. You’re trying to decide whether to be nice or mean. What’s the payoff to you if you switch your behavior from mean to nice?

Individual payout of becoming 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?

1-You are more likely to be nice when you keep your own tips.

2-You are equally likely to be nice in either tip arrangement.

3-You are more likely to be nice in a tip pool.

If the restaurant cares a lot about keeping its customers happy, which policy will it follow?

1-The restaurant will use a tip pool.

2-The restaurant will let servers keep their own tips.

3-The restaurant is indifferent between the two tip arrangements because it generates the same likelihood of servers being friendly.