Optimal Monitoring with External Incentives: The Case of Tipping

29 Pages Posted: 4 Nov 2005

See all articles by Ofer H. Azar

Ofer H. Azar

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

Abstract

This article examines the optimal choice of monitoring intensity when workers face external incentives (incentives that are not provided by the firm), such as tips, satisfaction from working well, or the desire to build reputation in order to be more attractive to other employers. Increase in such external incentives reduces optimal monitoring intensity but nevertheless increases effort and profits unambiguously. The model explains why U.S. firms supported the establishment of tipping in the late 19th century but raises the possibility that European firms make costly mistakes by replacing tips with service charges.

Keywords: external incentives, tipping, monitoring, intrinsic motivation, reputation

JEL Classification: L20, L80, D21, J30

Suggested Citation

Azar, Ofer H., Optimal Monitoring with External Incentives: The Case of Tipping. Southern Economic Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=831425

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

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