By allowing tipping, a restaurant can solve adverse selection in employing waiters by creating a
A) separating equilibrium
B) symmetric equilibrium
C) pooling equilibrium

Question

Quizplus · Accepted Answer

A separating equilibrium occurs when different types of workers (e.g., high-effort vs. low-effort) are sorted into different outcomes based on their actions or characteristics. Tipping allows customers to directly reward waiters based on their service quality, encouraging high-effort waiters to self-select into the job and work hard, thus separating them from low-effort waiters.

By Allowing Tipping, a Restaurant Can Solve Adverse Selection in Employing