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

32 Pages Posted: 12 Aug 2007 Last revised: 9 Oct 2007

See all articles by Ofer H. Azar

Ofer H. Azar

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management

Yossef Tobol

The Jerusalem College of Technology; The Carmel Academic Center

Abstract

We present an optimal-control model where tipping behavior creates 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 suggests 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.

Keywords: Tipping, Service Industry, Behavioral Economics, Social Norms, Service Quality, Optimal Control

JEL Classification: L83, D11, Z13, C61

Suggested Citation

Azar, Ofer H. and Tobol, Yossef, Tipping as a Strategic Investment in Service Quality: An Optimal-Control Analysis of Repeated Interactions in the Service Industry. Southern Economic Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1006632

Ofer H. Azar (Contact Author)

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management ( email )

P.O. Box 653
Beer-Sheva, 84105
Israel
+972 8 6472675 (Phone)
+972 8 6477691 (Fax)

HOME PAGE: http://www.oferazar.com

Yossef Tobol

The Jerusalem College of Technology ( email )

Jerusalem
Israel

HOME PAGE: http://www.jct.ac.il/he/tobol

The Carmel Academic Center ( email )

Haifa
Israel

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