IDEAS home Printed from https://ideas.repec.org/a/wly/soecon/v75y2008i1p246-260.html
   My bibliography  Save this article

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

Author

Listed:
  • Ofer H. Azar
  • Yossi Tobol

Abstract

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.

Suggested Citation

  • 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, John Wiley & Sons, vol. 75(1), pages 246-260, July.
    • Handle: RePEc:wly:soecon:v:75:y:2008:i:1:p:246-260
    DOI: 10.1002/j.2325-8012.2008.tb00902.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/j.2325-8012.2008.tb00902.x
    Download Restriction: no
    File URL: https://libkey.io/10.1002/j.2325-8012.2008.tb00902.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, John Wiley & Sons, vol. 71(1), pages 170-181, July.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Ofer H. Azar, 2004. "Optimal Monitoring with External Incentives: The Case of Tipping," Southern Economic Journal, John Wiley & Sons, vol. 71(1), pages 170-181, July.
    8. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    9. 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.
    10. Ofer Azar, 2005. "Who do we tip and why? An empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1871-1879.
    11. 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 728-741, September.
    12. 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.
    13. Matt Parrett, 2006. "An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 489-514, October.
    14. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
    15. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-349, April.
    16. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, August.
    17. Ruffle, Bradley J., 1999. "Gift giving with emotions," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 399-420, July.
    18. Ofer H. Azar, 2003. "The implications of tipping for economics and management," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 30(10), pages 1084-1094, October.
    19. Jacob, Nancy L & Page, Alfred N, 1980. "Production, Information Costs, and Economic Organization: The Buyer Monitoring Case," American Economic Review, American Economic Association, vol. 70(3), pages 476-478, June.
    20. Azar, Ofer H., 2004. "The history of tipping--from sixteenth-century England to United States in the 1910s," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(6), pages 745-764, December.
    21. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation," International Economic Association Series, in: L.-A. Gérard-Varet & S.-C. Kolm & J. Mercier Ythier (ed.), The Economics of Reciprocity, Giving and Altruism, chapter 7, pages 153-173, Palgrave Macmillan.
    22. 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.
    23. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ge, Qi, 2018. "Sports sentiment and tipping behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 95-113.
    2. 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.
    3. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Azar, Ofer H., 2006. "Tipping, firm strategy, and industrial organization," MPRA Paper 4485, University Library of Munich, Germany.
    2. Azar, Ofer H., 2011. "Business strategy and the social norm of tipping," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 515-525, June.
    3. 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.
    4. Azar, Ofer H., 2009. "Tipping motivations and behavior in the US and Israel," MPRA Paper 20304, University Library of Munich, Germany.
    5. 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.
    6. Ofer Azar, 2005. "The Social Norm of Tipping: Does it Improve Social Welfare?," Journal of Economics, Springer, vol. 85(2), pages 141-173, August.
    7. Lynn, Michael, 2015. "Service gratuities and tipping: A motivational framework," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 74-88.
    8. 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.
    9. Ofer H. Azar, 2020. "The Economics of Tipping," Journal of Economic Perspectives, American Economic Association, vol. 34(2), pages 215-236, Spring.
    10. Ofer H. Azar, 2003. "The Social Norm of Tipping: A Review," Others 0309006, University Library of Munich, Germany.
    11. 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.
    12. 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.
    13. Saunders, Stephen G. & Lynn, Michael, 2010. "Why tip? An empirical test of motivations for tipping car guards," Journal of Economic Psychology, Elsevier, vol. 31(1), pages 106-113, February.
    14. 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.
    15. Parrett, Matt, 2015. "Beauty and the feast: Examining the effect of beauty on earnings using restaurant tipping data," Journal of Economic Psychology, Elsevier, vol. 49(C), pages 34-46.
    16. Matt Parrett, 2006. "An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 489-514, October.
    17. 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.
    18. Ofer H. Azar, 2003. "The implications of tipping for economics and management," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 30(10), pages 1084-1094, October.
    19. Amir B. Ferreira Neto & Adam Nowak & Amanda Ross, 2017. "Do tourists tip more than local consumers? Evidence of taxi rides in New York City," Working Papers 17-14, Department of Economics, West Virginia University.
    20. Azar, Ofer H., 2012. "The effect of the minimum wage for tipped workers on firm strategy, employees and social welfare," Labour Economics, Elsevier, vol. 19(5), pages 748-755.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:soecon:v:75:y:2008:i:1:p:246-260. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)2325-8012 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.