Eliminating Employee Theft and the Principal-Agent Problem

Amanda DeWitt HB- Each year, employee theft costs U.S. businesses more than 50 billion dollars, and employee theft is responsible for 33 percent of all business bankruptcies. The U.S. Chamber of Commerce estimates that 75 percent of all employees steal at least once, and that half of these steal repeatedly. The Chamber also reports that one of every three business failures is the direct result of employee theft.[1] This makes it one of the most costly and widespread challenges faced by U.S. businesses today. That being said, if employee theft causes so much harm to businesses annually, then why does it occur, and how can employers create incentives to ensure that employee theft is not a problem is their business?

Employee theft is a typical result of the principal-agent problem. The principal (employer) employs an agent (employee) who has an incentive to do a lot of things that are not necessarily in the best interest of the firm.[2] Employee theft occurs when a problem arises with the relationship. When this problem occurs, the agent decides to act in their own best interest instead of the principal’s. However, in the case of employee theft, it is rarely a specific problem that encourages an employee to steal. Thieves rarely take from their employer because of need, they usually steal because an opportunity to do so has presented itself. That being said, an employee is more likely to steal if the chances of getting caught are low.

There are certain actions that the principal can take in order to encourage the agent not to steal. In other words, employers try and create an incentive for an employee not to take from them. One tactic retail shops take is publishing a phone number that employees can call if they suspect their co-worker of stealing money or taking merchandise. Over the phone, employees can leave anonymous tips in which the employer promises not to disclose their name to others. If the tip about the theft is right, then they get reward. This tactic provides an incentive for employees to monitor one another in the workplace, therefore increasing the chances of an employee getting caught for theft which lowers the incentive to steal.[3] At a large sawmill where workers were stealing about one million dollars in equipment, management put in place a library system where employees could check out the same type of equipment that was being stolen. Because most of the employees at the mill were committing theft for the fun of it, and they did not need the items they were stealing, the library system killed the thrill of it.[4] There was no longer a point in stealing something if it was already free, and the workers no longer wanted to brag about all of the theft they got away with. The effect of the library system was immediate, and the theft dropped to almost zero.

Every year, millions of businesses go bankrupt because of employee theft. Statistically, more employees steal because they have the opportunity to, not because of need. Because employee theft is a result of the principal-agent problem, employers are able to create tactics that either encourage employees to monitor one another “kill the thrill” of theft. When these programs are put in place, it creates an incentive for employees to not commit theft.

 

[1] “Business Practical Knowledge,” Business Practical Knowledge, June 13, 2016, https://businesspracticalknowledge.wordpress.com/legal-security/employee-theft/.

[2] Charles Wheelan, Naked Economics Undressing the Dismal Science (New York: W.W. Norton & Company, Inc., 2010), 39.

[3] Nancy Tanker, “Specialty Retail Report,” ICSC, June 13, 2016, http://specialtyretail.com/issue/2008/10/running-a-cart-or-kiosk/strategies-to-prevent-shoplifting-and-employee-theft/.

[4] Robert Sutton, “Psychology Today,” Sussex Publishers, June 13, 2016, https://www.psychologytoday.com/blog/work-matters/201001/strange-effective-way-stop-employee-theft

Photograph:  Business Man Hiding Money in Jacket Pocket. April 20, 2016.

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