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Signaling and Efficiency in Gift Exchange: An Application to Tipping

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  • Tom Hamami

Abstract

In the gift exchange principal–agent game, other‐regarding preferences can be sufficient to support an efficient equilibrium with a strictly positive transfer. When the agent is uncertain about the altruism of the principal or the extent to which the principal adheres to social norms, however, he chooses a suboptimal level of effort to insure himself against unfair outcomes. I demonstrate that under certain conditions, a relatively simple change to the structure of the game allows the principal to costlessly signal his type and restores efficiency. I argue that this result has implications for the design of gratuity‐based service industries. Copyright © 2016 John Wiley & Sons, Ltd.

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  • Tom Hamami, 2017. "Signaling and Efficiency in Gift Exchange: An Application to Tipping," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(6), pages 754-764, September.
    • Handle: RePEc:wly:mgtdec:v:38:y:2017:i:6:p:754-764
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