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Optimal Monitoring with External Incentives: The Case of Tipping

  • Ofer H. Azar

    (Northwestern University)

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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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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