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

Hamami, Tom, Signaling and Efficiency in Gift Exchange: An Application to Tipping (February 29, 2016). Managerial and Decision Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2432464 or http://dx.doi.org/10.2139/ssrn.2432464

Tom Hamami (Contact Author)

Northwestern University, Department of Managerial Economics and Decision Sciences (MEDS), Students ( email )

Evanston, IL
United States

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