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Inefficient incentives and nonprice allocations: Experimental evidence from big‐box restaurants

Sacha Kapoor ()

Journal of Economics & Management Strategy, 2020, vol. 29, issue 2, 401-419

Abstract: Queues are puzzling because they are consistent with wasted profit in equilibrium. Standard rationales trace the puzzle to the pricing of goods. This article uses field experimental evidence from large‐scale restaurants to trace the puzzle to the pricing of labor. The customary wage contract in these settings fosters congestion and longer queues because it can encourage workers to emphasize the quality rather than quantity of output. To study this problem, the field experiment pays waiters bonuses for customer volume on days with excess demand, in addition to the tips and hourly wages they customarily receive. The experimental contract shortens queues substantially, generating surplus gains for consumers with no discernible cost in terms of perceived service quality. Workers earn more via the bonuses and because they earn more in tips. Short‐run profits increase by at least 49%. There is no discernible reduction in long‐run profit. The firm reverted to the baseline contract on excess demand days after many months of evidence, even after acknowledging the gains from the experimental contract. The evidence suggests the puzzle may partly be explained by inefficient wage contracting.

Date: 2020
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Handle: RePEc:bla:jemstr:v:29:y:2020:i:2:p:401-419