Signaling and Efficiency in Gift Exchange: An Application to Tipping

Tom Hamami

Managerial and Decision Economics, 2017, vol. 38, issue 6, 754-764

Abstract: In the gift exchange principal–agent game, other‐regarding preferences can be sufficient to support an efficient equilibrium with a strictly positive transfer. When the agent is uncertain about the altruism of the principal or the extent to which the principal adheres to social norms, 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. Copyright © 2016 John Wiley & Sons, Ltd.

Date: 2017
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