Signaling and Efficiency in Gift Exchange: An Application to Tipping
Managerial and Decision Economics, Forthcoming
31 Pages Posted: 5 May 2014 Last revised: 28 May 2016
Date Written: February 29, 2016
Abstract
In the gift exchange principal-agent game, other-regarding preferences are sufficient to support an efficient equilibrium with a strictly positive transfer. When the agent is uncertain about the altruism of the principal, 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.
Keywords: Other-regarding preferences, Gift Exchange, Tipping, Altruism, Social norms
JEL Classification: C70, D02, D64, J30
Suggested Citation: Suggested Citation
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