Optimal Monitoring with External Incentives: The Case of Tipping

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Optimal Monitoring with External Incentives: The Case of Tipping

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Ofer H. Azar () (Department of Economics, Northwestern University)

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Ofer H. Azar

Abstract

This 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 and raises the possibility that European firms make costly mistakes by replacing tips with service charges.

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

Volume (Year): 71 (2004)
Issue (Month): 1 (July)
Pages: 170-181
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Handle: RePEc:sej:ancoec:v:71:1:y:2004:p:170-181

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Paper
- Ofer H. Azar, 2003. "Optimal Monitoring with External Incentives: The Case of Tipping," Industrial Organization 0312004, EconWPA. [Downloadable!]

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

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Ofer Azar, 2008. "Strategic Behavior and Social Norms in Tipped Service Industries," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1), pages 1778-1778. [Downloadable!] (restricted)
Ofer H. Azar, 2005. "Who Do We Tip and Why? An Empirical Investigation," Labor and Demography 0502005, EconWPA. [Downloadable!]
Other versions:
- Ofer H. Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor and Francis Journals, vol. 37(16), pages 1871-1879, September. [Downloadable!] (restricted)
Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, EconWPA. [Downloadable!]
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:
- Azar, Ofer H., 2007. "Why pay extra? Tipping and the importance of social norms and feelings in economic theory," The Journal of Socio-Economics, Elsevier, vol. 36(2), pages 250-265, April. [Downloadable!] (restricted)
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:
- Ofer Azar, 2009. "Incentives and service quality in the restaurant industry: the tipping-service puzzle," Applied Economics, Taylor and Francis Journals, vol. 41(15), pages 1917-1927. [Downloadable!] (restricted)
Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany. [Downloadable!]
Ofer H. Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Others 0503013, EconWPA. [Downloadable!]
Other versions:
- Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, 08. [Downloadable!] (restricted)
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:
- 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.

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