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

• Author: Sacha Kapoor
• DOI: http://doi.org/10.1111/jems.12346
• Date: 01 April 2020
• Published date: 01 April 2020

J Econ Manage Strat. 2020;29:401–419. wileyonlinelibrary.com/journal/jems

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401

Received: 6 October 2017

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Revised: 10 January 2020

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Accepted: 15 March 2020

DOI: 10.1111/jems.12346

ORIGINAL ARTICLE

Inefficient incentives and nonprice allocations:

Experimental evidence from big‐box restaurants

Sacha Kapoor

Erasmus University Rotterdam,

Rotterdam, The Netherlands

Correspondence

Sacha Kapoor, Erasmus University

Rotterdam, Burgemeester Oudlaan 50,

3062 PA Rotterdam, The Netherlands.

Email: kapoor@ese.eur.nl

Funding information

Social Sciences and Humanities Research

Council of Canada

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

becausetheyearnmoreintips.Short‐run profits increase by at least 49%. There is

no discernible reduction in long‐run profit. The firm reverted to the baseline con-

tract on excess demand days after many months of evidence, even after acknowl-

edging the gains from the experimental contract. The evidence suggests the puzzle

may partly be explained by inefficient wage contracting.

KEYWORDS

congestion externalities, nonprice rationing, profit maximization, queues, restaurants, uniform

pricing, wage contracts

JEL CLASSIFICATION

J33; L81; M52

1|INTRODUCTION

Why do businesses use queues to allocate goods among consumers? Queues are suggestive of excess demand, where the

goods are priced below market clearing levels, and where a capacity constrained business can increase profit simply by

raising prices. Becker (1991) famously identified this situation as puzzling because it fit poorly with conventional profit‐

maximizing pricing models at the time. Becker rationalized queues via a model of social influence, where consumers

value goods more when the goods are valued by other consumers, aggregate demand is consequently increasing in price

over some range, and prices are relatively high rather than relatively low. In his model queues can coexist with high

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the original work is properly cited.

© 2020 The Authors. Journal of Economics & Management Strategy published by Wiley Periodicals, Inc.

profit‐maximizing prices in equilibrium. While his argument stimulated scholarship into the role of social interactions

in markets, its applicability outside of markets for fashionable luxury goods seems limited.

An alternative argument is consumers perceive price increases during supply shortages as unfair relative to queues,

and that businesses keep prices fixed because aggrieved consumers will punish them later on (Rotemberg, 2005). This

argument applies to a broader class of goods because it supports the coexistence of queues and low profit‐maximizing

prices in equilibrium. While the argument is intuitive, empirical support for it is mixed to nonexistent. For example, in

surveys of restaurant customers, Kimes and Wirtz (2003) found consumers perceive time‐of‐day pricing as fair and are

neutral on the fairness of day‐of‐week pricing. Furthermore, as Becker (1991) himself notes, the long run implications

of these perceptions are unclear. If prices are situational and consumers know this, they should be able to sort into their

strategically preferred situation with relative ease.

A third argument recognizes the opportunity costs of the space used to serve customers (Lott & Roberts, 1991).

Longer service times per customer lengthen queues and expected wait times for prospective customers. The congestion

externality increases the opportunity cost of serving pre‐existing customers and the implicit rent paid to these customers

for every extra minute they stay. The implicit rental rates are then capitalized into goods prices.

1

This justification for

queues is appealing because it better suits the realities of these production settings. It is problematic because it implies

goods prices track implicit rental rates, varying smoothly therefore with queues and expected wait times. But this is

opposite to what is observed in many retail segments, as many businesses practice uniform pricing (DellaVigna &

Gentzkow, 2019), charging the same price for the same good in all situations.

The above arguments all tie the existence of queues to the pricing of goods. Neither of the arguments ties their

existence to the pricing of the labor used in serving consumers. This is surprising because average service times are

outcomes of repeated interactions between customers and workers, making worker behavior a potentially important

driver of congestion externalities and queues in turn. From this perspective, the puzzle may be as much about why

wage contracts are not used to better exploit queues as it is about why goods pricing is not used. The present article

explores this possibility empirically, specifically considering the role of wage contracts toward queues and efficiency

using (field) experimental evidence from big‐box restaurants.

Big‐box restaurants are full‐service restaurants that belong to retail chains where the focus is on mass production of

standardized packages of goods and services. Standardization implies relatively small differences in revenue per cus-

tomer across customers and that customer volume is consequently the primary instrument for increasing revenue. The

context is useful for several reasons. First, queues are commonplace. Second, the customary wage contract—tips and

hourly wages—generates incentives for customer volume that are too weak (or incentives for customer service that are

too strong) from the perspective of the firm.

2

There are ex ante reasons, therefore, to suspect the customary wage

contract as a primary driver of long queues and inefficiency.

To investigate whether this is the case, I engineered an exogenous change in the customary wage contract at a big‐

box restaurant on excess demand days, wherein waiters were paid bonuses for their customer volume in addition to

their tips and hourly wages. The experiment is complemented by rich administrative data from a couple of franchises

from a big‐box chain. The data facilitates an in depth investigation into the causal effect of the alternative contract on

consumers, workers, and the firm. The customer data includes a proxy for queue length, the tips they pay, and whether

they return at a later date. The worker data includes rich detail about their activities and performance. The firm data

includes profit metrics for both the short and longer run.

The evidence shows a sharp reduction in excess demand under the experimental contract. This is suggestive of surplus

gains for both low and high value consumers. Low value consumers gain because of reallocation from their outside option

(another restaurant, eating at home, e.g.) to a more preferred option. High value consumers, who would have stayed under

the customary contract, gain because they save on costly waiting time. While I find some suggestive evidence of a reduction

in the service quality workers deliver, there is no discernible effect on tip rates, consistent with a low cost to the surplus gains

in terms of overall service quality. No tip rate effect may alternatively be attributable to shorter wait times or faster service,

which can compensate customers for marginal reductions in other aspects of personal service quality.

The experimental contract increased worker earnings by 10%. Workers earned more via the bonuses and because they earn

more in tips. I exploit some dynamics in the experimental design to provide evidence of the experimental contract compen-

sating them for costly effort. The evidence implies nonnegative surplus gains for workers during the experiment.

The experimental contract increased firm revenue by 10%. It increased short‐run profit by at least 49%. I find no

evidence of an effect on repeat business (up or down) and thus on profit in the months following the treatment. Taken

together, the results suggests that the experimental contract may be Pareto improving.

If this is the case, then why use the customary contract on excess demand days initially? I explore several justifi-

cations. I investigate whether the customary contract was initially supplemented by informal arrangements. I show

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