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Optimal Monitoring with External Incentives: The Case of Tipping

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  • Ofer H. Azar

    (Northwestern University)

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.

Suggested Citation

  • Ofer H. Azar, 2003. "Optimal Monitoring with External Incentives: The Case of Tipping," Industrial Organization 0312004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0312004
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    Cited by:

    1. Azar, Ofer H., 2011. "Business strategy and the social norm of tipping," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 515-525, June.
    2. Lynn, Michael & Jabbour, Patrick & Kim, Woo Gon, 2012. "Who uses tips as a reward for service and when? An examination of potential moderators of the service–tipping relationship," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 90-103.
    3. Holland, Steven J., 2009. "Tipping as risk sharing," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 641-647, August.
    4. Ofer Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1871-1879.
    5. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
    6. 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.
    7. Lynn, Michael & Wang, Shuo, 2013. "The indirect effects of tipping policies on patronage intentions through perceived expensiveness, fairness, and quality," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 62-71.
    8. 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.
    9. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    10. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, August.
    11. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany.
    12. Ofer H. Azar & Yossi Tobol, 2008. "Tipping as a Strategic Investment in Service Quality: An Optimal-Control Analysis of Repeated Interactions in the Service Industry," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 246-260, July.
    13. Natter, Martin & Kaufmann, Katharina, 2015. "Voluntary market payments: Underlying motives, success drivers and success potentials," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 57(C), pages 149-157.
    14. Lynn, Michael, 2016. "Why are we more likely to tip some service occupations than others? Theory, evidence, and implications," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 134-150.

    More about this item

    Keywords

    external incentives; tipping; monitoring; intrinsic motivation; reputation;

    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: Theory
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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