Wednesday, May 3, 2017

Why don't restaurants give rejected food to hungry servers?

When you order a meal and what you receive isn't what you expected, you can either suffer through it or send it back. If food gets returned, many restaurants have rules to prevent the cooks and servers from eating it.  On its face, this seems inefficient, as good food is discarded.

QUESTION: Why do restaurants have these rules? (Hint:  incentives, Chapter 1)

ANSWER:  To answer the question we consider all the benefits and costs that vary with the consequence of the rule (Chapter 3).
  • The obvious benefit of giving food to hungry servers and cooks is that you increase the attractiveness of working at the restaurant, which allows you to reduce their wages (the "compensating differentials" of Chapter 9).  
  • However, the hidden cost of giving rejected food to the staff is that you create incentives for hungry staff members to deliberately mess up orders so they can get free food.  
If a restaurant has rules preventing staff from eating rejected food, one could infer that the costs are bigger than the benefits, and that the agency cost (Chapter 21) of trying to control this kind of perverse behavior are large.

HT:  Jake

Copyright 2017, Froeb (if the publishers let me, I will stick this question into the fifth edition)

3 comments:

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  2. This is an interesting post and I often wondered why restaurants would be willing to waste perfectly good food that they have already paid for (as far as the cost of ingredients/paying wages to a cook etc.) This concept also involves a cost dilemma as money has already been spent on an item in which there may an excessive amount prepared that eventually just gets thrown out. Without looking at it from an economics perspective an owner may just give the food away for free since it will be disposed of anyway. However, there are additional costs associated with this decision. Another hidden cost in your scenario described above is the hidden cost of the money employees would have spent on their own food purchases at the restraint on a “lunch break”. If you are giving away free food to employees they will not be willing to purchase a sandwich or salad with their own money at the restaurant when they become hungry. The hidden-cost fallacy occurs when you ignore relevant costs-those costs that do vary with the consequences of your decisions (Froeb, McCann, Shor, Ward 2016). When I worked at a grocery store there was excessive prepared food available every day, but there was strict policy in place against giving this food away to employees. Employees of the store spent their own money all the time on food items in the store, so this policy helped generate revenue and also prevented employees from making excessive amounts of prepared food just to consume themselves. This would have led to additional purchase costs for ingredients for the store.

    References:

    Managerial Economics: A Problem Solving Approach; Froeb, L.M., B.T. McCann, M. Shor, and M.R. Ward. South-Western Cengage Learning; 4th Edition 2016


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  3. I managed luxury stores for many years. Often customers would return a slightly damaged bag (often times there was a small pen mark or one stitch was crooked). We were told to cut these bags up and throw them away. Many times I asked the executive management team if I could use them as an incentive but was told no. I did not understand it at the time... after studying economics it makes sense. For instance, there are hidden costs-- the store is losing money, because the employee could have purchased their own bag. Furthermore, if the employee is receiving a $1,000 handbag for free, should they be making less of a wage? In the instance of wanting to give the bags as incentives, I was ignoring other costs (hidden costs).

    The employees would benefit more from this job. "Wages adjust to restore equilibrium... once equilibrium is reached, differences in wages, called compensating wage differentials, reflect differences in inherent attractiveness of various professions" (Froeb et al pp. 116-117). In other words, if a $10 an hour retail job started giving out $1,000 bags to its employees many people would want to work there, perhaps for the wrong reason.

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