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

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. K E Y W O R D S congestion externalities, nonprice rationing, profit maximization, queues, restaurants, uniform pricing, wage contracts J E L C L A S S I F I C A T I O N J33; L81; M52 | INTRODUCTIONWhy 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 profitmaximizing 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 ---This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

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