Hotel extras
Exercise
Many organizations pay the travel expenses and hotel bills of their guests. Most of them, however, do not pay for hotel extras (meals, telephone calls and complementary services). This may seem bizarre, given that guests frequently pay these extras with income subject to taxation. One could imagine a more satisfactory arrangement, under which guests would receive a smaller stipend, the host organization would pay the extras and both parties would be better off. Provide two moral hazard explanations—linked to two of the parties involved, hotels and guests—why this alternative is probably inefficient.
Analysis
The first explanation is obvious: the guest would tend to overspend, especially if in the context of one-shot interactions. However, even for repeated transactions, the alternative of the host paying for guests’ extras which are not fixed (as the per night cost of a hotel room) would put the hotel in the position to claim extras larger than the ones really spent. The practice of hotels of having guests signing those invoices that they do not pay responds to this problem. It is an imperfect safeguard, however, as guests frequently forget signing them and this allows unscrupulous hotels to claim they have not signed them and inflate their expenses. In the long run, hotels might also increase their supply of services.
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