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Optimal Monitoring with External Incentives: The Case of Tipping

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Author Info
Ofer H. Azar (Northwestern University)

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Abstract

The article examines the optimal choice of monitoring intensity when workers face external incentives (incentives that are not provided by the firm), such as tips, satisfaction from working well, or the desire to build reputation in order to be more attractive to other employers. Increase in such external incentives reduces optimal monitoring intensity but nevertheless increases effort and profits unambiguously. The model explains why U.S. firms supported the establishment of tipping in the late 19th century but raises the possibility that European firms make costly mistakes by replacing tips with service charges.

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File URL: http://129.3.20.41/eps/io/papers/0312/0312004.pdf
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Publisher Info
Paper provided by EconWPA in its series Industrial Organization with number 0312004.

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Date of creation: 19 Dec 2003
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Handle: RePEc:wpa:wuwpio:0312004

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Web page: http://129.3.20.41

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Related research
Keywords: external incentives; tipping; monitoring; intrinsic motivation; reputation;

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Find related papers by JEL classification:
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
L80 - Industrial Organization - - Industry Studies: Services - - - General
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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  1. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA. [Downloadable!]
  2. Ofer H. Azar, 2005. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Microeconomics 0503005, EconWPA. [Downloadable!]
    Other versions:
  3. repec:bep:eaptop:v:8:y:2008:i:1:p:1778-1778 is not listed on IDEAS
  4. Ofer H. Azar, 2005. "Who Do We Tip and Why? An Empirical Investigation," Labor and Demography 0502005, EconWPA. [Downloadable!]
    Other versions:
  5. Azar, Ofer H., 2005. "Incentives and Service Quality in the Restaurant Industry: The Tipping – Service Puzzle," MPRA Paper 4457, University Library of Munich, Germany, revised 2006. [Downloadable!]
    Other versions:
  6. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany. [Downloadable!]
  7. Ofer H. Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Others 0503013, EconWPA. [Downloadable!]
    Other versions:
  8. Azar, Ofer H. & Tobol, Yossi, 2006. "Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry," MPRA Paper 4393, University Library of Munich, Germany, revised 2007. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-13.

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