Economists Do It With Models

Warning: “graphic” content…

Bookmark and Share
Fun With Incentives, Retail Edition…

February 9th, 2011 · 3 Comments

This morning I saw the following picture on Greg Mankiw’s blog:

I don’t know about you, but I see these sorts of offers around every once in a while. Also, I don’t know about you, but *I* stop and ponder why these policies are in place. As it turns out, the explanation is both simple and a little depressing.

The situation that the manager (or owner) of a business and the employee that he hires to ring up sales are in is a classic example of a principal-agent problem. The manager, acting as the principal, wants the employee, acting as his agent, to behave in the best interests of the business (i.e. the manager), but what is best for the manager is not what is best for the employee. In this instance, it’s best for the manager if the employee rings up sales legitimately and accurately (unless of course the manager is involved in some sort of embezzlement scheme, but that is another matter entirely). However, it’s best for the employee, in the short run at least, to steal all of the money from the cash drawer. Realistically, the employee probably won’t do this for fear of getting fired/arrested/etc., since a drawer of missing cash is pretty easy to spot. But what if the employee could make it less obvious that anything was taken? Consider the following scenario (from Arrested Development, in case you don’t recognize it):

Maeby: I can’t believe I volunteered for this. This is my stupidest rebellion ever. (taking money from the register) Hey, you want to go play skee-ball?

George Michael: Well, this is the cash drawer. My dad’s going to come by at the end of the weekend and the number of bananas has to match the amount of money in here.

Maeby: Oh, so it all has to even out?

George Michael: Exactly.

Maeby: Easy. Banana… (throws a banana into a garbage bin…) Buck. (and takes a buck from the register) Banana… Take a buck. (doing it again as George Michael just watches)

Frozen banana stand. Now T-Bone has joined George Michael and Maeby in the stand.

Maeby: Well, now that we’ve got an employee, we can go have dinner. (opens the register, takes some cash and throws a bunch of bananas to the garbage. As she counts the money, she explains to T-Bone) We throw away a banana for every buck we take so no one finds out.

T-Bone: Wait a minute, I think you should do that math again.

George Michael: (really nervous) Wh-why? Is it wrong?

Maeby: It’s fine. He’s an arsonist, not an embezzler.

George Michael: You know, I think we might be doubling our losses here. Because, I mean, for every dollar you take, you’re actually taking two dollars because we paid for the bananas.

Maeby: (laughs) Oh, my God, you’re right.

Clearly, Maeby and George Michael are not particularly good at covering their tracks, but a slight modification of this plan would make stealing harder to detect than just raiding the cash drawer. Theoretically, a cashier could take money from a customer without ringing in the sale and then pocket the money rather than putting it in the cash drawer. This behavior could be hard to spot, since the only way that the manager would catch on is if it was obvious that the remaining inventory didn’t match (inversely, not directly as Maeby had presumed) with the amount of sales rung up.

One way to overcome this misalignment of incentives is for the manager to watch the cashier like a hawk in order to make sure that he’s not doing anything bad, but this isn’t generally an appealing option for the manager. The manager who designed the sign above, on the other hand, has come up with a smarter way of mitigating the problem. This manager recognized that the key feature of an illegitimate transaction is the lack of a receipt, and he’s given customers an incentive to alert him as to this form of bad behavior on the part of the cashier. Furthermore, since the cashier knows that the policy is in place, he will most likely not try to conduct illegitimate transactions, which means that the reward offer probably won’t even cost the manager anything.

A few related observations:

  • Have you ever wondered what on earth the purpose of the receipt checkers at Best Buy, Wal-Mart etc. is? I mean, the process of receipt checking seems sort of redundant and/or idiotic if the receipt checker watches you go through the checkout line in the first place. If you’ve ever worked in retail, you probably know that most theft (shrinkage, in retail terminology) is attributable to employees as opposed to random petty thieves. (I’m not accusing, mind you, I’m just assuming that this was mentioned in a staff meeting at some point.) The receipt checker is a way of getting employees to monitor each other- otherwise, what is stopping a cashier from pretending to ring up an item for a friend and then having the friend walk out of the store with it and give it to the cashier at a later point? Not that I’ve considered doing this or anything. (Obviously the cashier could still conspire with the receipt checker, but at least the manager has made it more difficult for stuff to walk out of the store.)
  • I mentioned above that the “pretend to ring stuff up and then pocket the cash” strategy is harder to detect when it’s more difficult to match up remaining inventory to sales. My observation that I most often see signs like the one above at Panda Express in the mall food court is consistent with this observation- would *you* be able to tell whether cashiers pocketed money or just happened to be extra generous with the portions of General Gau’s chicken?
  • The parking garage by my office has a fantastic coupon available online that reduces the cost of my parking from $20 to $8. (Price discrimination anyone? Also, if you live in Boston, you might find these coupons helpful.) The catch is that there are two seemingly arbitrary stipulations on using the coupon- I have to print and sign a new coupon each time I want to use it, and I have to pay for the parking with a credit or debit card (i.e. not cash). Given the above discussion, can you figure out why this is?*

Just remember, there’s always money in the banana stand.

* Without these restrictions, the parking garage cashier could print up a bunch of coupons, collect the regular $20 in cash from people, put $8 in the cash drawer and say that the people used coupons, and then pocket the $12 difference. This is one of the many reasons I will never be hired to work in a parking garage.

Tags: Incentives

3 responses so far ↓

  • 1 Pete // Feb 9, 2011 at 6:33 pm

    Your timing is perfect. I have spent most of my day counting physical inventory in our store. My back aches—but I did get to play with the wireless scanner.

    Most of our inventory is in shambles because the company has history cut lots of corners. If a product doesn’t have a barcode or doesn’t scan correctly it is just rung up as a generic item. If price tags don’t match what the computer thinks is correct, cashiers are authorized to just change prices at the register. Overall, we do absolutely nothing to discourage theft. We probably encourage it a little in some weird, subconscious ways.

    Incidentally, the place I immediately thought of at the beginning of your article is Panda Express. I think that may be their most memorable quality.

  • 2 Rev. Pfloyd // Feb 9, 2011 at 7:30 pm

    I used to work in inventory control for a manufacturing company (and was tasked with cleaning up a lot of loose ends that existed before my hiring), so I understand this stuff pretty well. Actually, it raises my blood pressure all over again.

    But a good example of this stuff in action is at a bar. I have noticed that if I get a cocktail with well drinks, the bartender pretty much just “eyeballs” the amount of liquor in the glass with ice already in it and just mixes the rest with whatever the mixer is. In fact, I noticed that the strength of all subsequent drinks is often proportionate with how good of a tip I initially gave, or if the bartender is someone I know.

    It all seems very innocent but let’s face it, theft is theft and loading the drinks like that is robbing the bar owner of revenue.

    Conversely, however, at the same bar I noticed if I order say a glass of Laphroiag, the bartender takes down the scotch bottle, sets up a shot glass, pours exactly the amount, and then pours *that* into my dram glass.

    Obviously, they are a lot more loose with the cheap hooch than they are with the pricier stuff. I’m sure someone is also watching that a lot closer.


  • 3 Sport Headphones Wireless // Nov 30, 2011 at 12:58 pm

    Everything that as i don’t understood is without a doubt actually the correct way you are not actually much more well -preferred rather than one might be now. You’re very reasonable. You realize thus considerably when it comes to it matter, made all of us individually consider the application as a result of numerous numerous angles. The nation’s enjoy women and men aren’t fascinated until it is one thing to help you do through Lady coo! Your personal things outstanding. All the time deal with the application together!

Leave a Comment