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Tipping as a Strategic Investment in Service Quality: An Optimal-Control Analysis of Repeated Interactions in the Service Industry

  • Ofer H. Azar


    (Department of Business Administration, Guilford Glazer School of Business and Management, Ben-Gurion University of the Negev, P.O.B. 653, Beer-Sheva 84105, Israel)

  • Yossi Tobol


    (Department of Economics and Interdisciplinary Department of Social Sciences, Bar-Ilan University, Ramat Gan 52900, Israel)

We present an optimal-control model in which tipping behavior creates a reputation that affects future service. Tipping and reputation can evolve in four path prototypes: converging to an interior equilibrium, converging to minimum tips and reputation, and two prototypes that start differently but end with tips and reputation increasing indefinitely. Analyzing the interior equilibrium indicates that when reputation erodes more quickly (capturing lower patronage frequency), equilibrium reputation is lower. Interestingly, however, tips may be higher. Increasing the minimal tip raises tips by the same increase and does not change reputation. A more patient customer leaves higher tips and reaches a higher reputation.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2008)
Issue (Month): 1 (July)
Pages: 246-260

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Handle: RePEc:sej:ancoec:v:75:1:y:2008:p:246-260
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  1. Azar, Ofer H., 2007. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 250-265, April.
  2. Matt Parrett, 2006. "An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 489–514, October.
  3. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, 08.
  4. Rachel Barkan & Aviad Israeli, 2004. "Testing servers' roles as experts and managers of tipping behaviour," The Service Industries Journal, Taylor & Francis Journals, vol. 24(6), pages 91-108, November.
  5. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers 040, Institute for Empirical Research in Economics - University of Zurich.
  6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  7. Lynn, Michael & McCall, Michael, 2000. "Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 29(2), pages 203-214.
  8. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, Southern Economic Association, vol. 71(1), pages 170-181, July.
  9. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA.
  10. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-49, April.
  11. Conlin, Michael & Lynn, Michael & O'Donoghue, Ted, 2003. "The norm of restaurant tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 297-321, November.
  12. Ofer Azar, 2009. "Incentives and service quality in the restaurant industry: the tipping-service puzzle," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1917-1927.
  13. Ofer H. Azar, 2005. "Who Do We Tip and Why? An Empirical Investigation," Labor and Demography 0502005, EconWPA.
  14. Ofer H. Azar, 2007. "Do people tip strategically, to improve future service? Theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 515-527, May.
  15. Lynn, Michael & Grassman, Andrea, 1990. "Restaurant tipping: an examination of three 'rational' explanations," Journal of Economic Psychology, Elsevier, vol. 11(2), pages 169-181, June.
  16. Ruffle, Bradley J., 1999. "Gift giving with emotions," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 399-420, July.
  17. Ofer H. Azar, 2003. "The implications of tipping for economics and management," Others 0309002, EconWPA.
  18. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
  19. Azar, Ofer H., 2004. "What sustains social norms and how they evolve?: The case of tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 49-64, May.
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