Pharma Sales

The Michigan Attorney General Bill Schuette notes that GlaxoSmithKline (GSK) has agreed to pay $105m to settle allegations by 44 US states and the District of Columbia that it promoted its medicines for unapproved uses.

GSK was accused of marketing its Advair asthma drug for use by mild asthma sufferers and antidepressants Paxil and Wellbutrin for use by children and teenagers without approval from the Food and Drug Administration (FDA). As noted in past posts - eg here - regarding GSK's collision with the FDA, several antidepressants have been associated with increased risk of suicide in younger patients. US pharmaceutical companies are allowed to promote their products only for conditions specifically approved by the FDA. (Medical practitioners are allowed to prescribe medicines as they see fit, including so called off-label uses.)

Schuette comments that

Consumers shouldn't have to wonder whether financial incentives are negatively influencing their medical care. Patients should always come before profits. Michigan consumers shouldn't have to wonder whether financial incentives are negatively influencing their medical care. This settlement will help put an end to the pharmaceutical companies' practice of promoting their drugs for uses that haven't been approved by the FDA, and ensure patient safety comes first.

Illinois peer Lisa Madigan commented "GlaxoSmithKline put its business interests ahead of what was best for vulnerable patients".

Under the settlement, GSK is banned from disseminating information describing any off-label use of a product, unless such information and materials are consistent with applicable FDA regulations and FDA guidance. GSK is also required to continue for five years its 'Patient First Programme' (that reduces the level of financial incentives by the company to sales representatives in order to reduce deceptive marketing) for five years.

The Complaint and Consent Judgment alleges that GlaxoSmithKline violated state consumer protection laws by misrepresenting the uses and qualities of the drugs.

Schuette's media release indicates that the settlement

requires scientifically trained personnel to be ultimately responsible for developing and approving responses to health care provider questions and for these responses to be unbiased and non-promotional. GSK is also prohibited from disseminating information that describes any off-label use of a GSK product, unless such information and materials are consistent with applicable FDA regulations.

Today's settlement will add to the more than $127.3 million recovered from drug companies by Schuette and his Health Care Fraud Division (HCFD) since he took office in 2011, resulting from criminal restitution orders, civil judgments, court orders and settlements requiring the return of funds to the Medicaid Program.

The states that participated in the settlement announced today are: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming.

Knives and Capacity

In R v Opie [2014] NSWSC 814 the New South Wales Supreme Court has entered a special verdict of not guilty of the charge of murder by reason of mental illness against an accused.

At  the time of killing Opie was suffering from a bipolar affective disorder, severe depression and acute psychosis, of sufficient severity so as to have made him unaware of the wrongfulness of his actions in stabbing the deceased and was unable to control himself.

His conduct at the scene in stabbing himself multiple times was consistent with him being mentally impaired.

Identities

Earlier this month The Australian reported that

A former executive with Zara parent Inditex is among three senior executives appointed by department store group Myer, as the company begins planning for the eventual departure of chief executive Bernie Brookes.

Andrew Flanagan, formerly managing director and Asia-­Pacific vice-president for Spanish fashion giant Inditex, has been ­appointed group general manager for strategy and business development, reporting to chief financial officer Mark Ashby.

In addition to Inditex, Mr Flanagan has served as chief operations officer of British retailer Tesco’s Chinese division, and held merchandising and procurement roles with international retailers Homeworld and Wal-Mart.

Mr Brookes said the hire did not indicate Myer was planning to expand offshore.

“Andrew set up Zara in Australia and was looking after 800 stores throughout Asia, and before that he was with Walmart and Tesco, so he has this worldly experience that will help us look at things in a different perspective,’ he said.

Today the Herald Sun reports

Myer has been forced to sack a new recruit just days into his appointment after his glowing references were thrown into doubt.

The department store group last week trumpeted its appointment of high-flyer Andrew Flanagan as group general manager of strategy and business development.

Mr Flanagan had a seemingly stellar business background, having reportedly worked as former managing director and vice president Asia Pacific of Inditex Group, which owns fashion giant Zara.

But Inditex Group’s Zara Australia today confirmed that Mr Flanagan “was not part and has never been employed by the company”.

“He has not held the position of managing director and vice president for Asia Pacific,” a Zara Australia spokesperson said.

Inditex is believed to have made Myer aware of the discrepancy. ....

“Myer announced today that Andrew Flanagan’s contract has been terminated,” the company said. “There are a number of investigations taking place.”

BusinessDaily understands that Mr Flanagan was presented to Myer as a potential candidate by a recruitment agency, complete with several detailed and glowing references from senior executives at the companies he claimed to have worked for.

Myer understood the references had been checked by the recruitment agency before Mr Flanagan was put forward for the position.

Somewhat less embarrassing than the exposure of Stephen Wilce in New Zealand but perplexing nonetheless.

Update

On 3 July the SMH reported

The silver-tongued American businessman who conned his way into a six-figure job at Myer served time in a Texas jail after being convicted of serious offences.

Texas Department of Public Safety records show Andrew Flanagan, then known as Jeffery Wayne Flanagan, was sentenced to four years' jail in 1992 after pleading guilty in a Dallas court to the charges of burglary, reckless driving, resisting arrest and assault.  ....

It is unclear how much time Mr Flanagan served in jail for the convictions. Documents show he was later paroled by the Dallas County Sheriff's Department. He received the jail term after being on probation for an earlier conviction for the illegal use of credit cards.

While Fairfax Media has been unable to speak to Mr Flanagan, the criminal record appears to corroborate other official documents filed in Australia. The rap sheet lists the same birth date and alias used on bankruptcy documents filed by Mr Flanagan in 2009. It records his place of birth as Arkansas, which matches company documents filed with ASIC.

The assault offence is listed as "retaliation", which the Texas penal code describes as the threat or harm against a public servant, witness, prospective witness, informant or someone reporting a crime.

On 11 July the SMH reported that Myer has

confirmed it will make a complaint to Victoria Police as early as Friday over the allegedly fraudulent behaviour of short-lived recruit Andrew Flanagan.

Mr Flanagan, who also goes by the name Jeffery, has a history of duping organisations into giving him senior roles, including Specialty Fashion, Bendigo Health, and the Australian Arab Chamber of Commerce.

Myer appointed him as general manager, strategy and business development, last month before being forced to publicly fire him over faking his references.

A Myer spokeswoman confirmed the company would refer the matter to police, alleging Mr Flanagan ''engaged in deceptive actions in order to make a financial gain''.

It's unclear whether there was sufficient gain for Mr Flanagan to be charged. Myer sacked him on his first day on the job before he was able to receive any of his pay.

On 28 July The Age reported

Mr Flanagan appeared on Monday morning in the Melbourne Magistrates Court for a filing hearing on a charge of obtaining a financial advantage by deception at Docklands on June 6.

The charge specifies that Mr Flanagan's alleged deception involved "using a resume and providing verbal employment history and references falsely stating he had held a number of senior executive business positions". ...

Prosecutor Julian Ayres ... asked that an order be made for the lodgement within seven days of exhibits with the police e-crime unit, which included Mr Flanagan's personal computer, three portable hard drives and 27 USB flash drives.

Privacy Economics

'Alan Westin's Privacy Homo Economicus' by Chris Jay Hoofnagle and Jennifer M. Urban in (2014) 49 Wake Forest Law Review 261 comment

 Homo economicus reliably makes an appearance in regulatory debates concerning information privacy. Under the still-dominant U.S. “notice and choice” approach to consumer information privacy, the rational consumer is expected to negotiate for privacy protection by reading privacy policies and selecting services consistent with her preferences. A longstanding model for predicting these preferences is Professor Alan Westin's well-known segmentation of consumers into “privacy pragmatists,” “privacy fundamentalists,” and “privacy unconcerned.” 

To be tenable as a protection for consumer interest, “notice and choice” requires homo economicus to be broadly reliable as a model. Consumers behaving according to the model will know what they want and how to get it in the marketplace, limiting regulatory approaches to information privacy. While notice and choice is undergoing strong theoretical, empirical, and political critique, U.S. Internet privacy law largely reflects these assumptions. 

This Article contributes to the ongoing debate about notice and choice in two main ways. First, we consider the legacy Westin's privacy segmentation model itself, which as greatly influenced the development of the notice-and-choice regime. Second, we report on original survey research, collected over four years, exploring Americans’ knowledge, preferences, and attitudes about a wide variety of data practices in online and mobile markets. Using these methods, we engage in considered textual analysis, empirical testing, and critique of Westin’s segmentation model. 

Our work both calls into question longstanding assumptions used by Westin and lends new insight into consumers’ privacy knowledge and preferences. A close textual look at factual and theoretical assumptions embedded in the segmentation model shows foundational flaws. With testing, we find that the segmentation model lacks validity in important dimensions. In analyzing data from nationwide, telephonic surveys of Internet and mobile phone users, we find an apparent knowledge gap among consumers concerning business practices and legal protections for privacy, calling into question Westin’s conclusion that a majority of consumers act pragmatically. We further find that those categorized as “privacy pragmatists” act differently from Westin’s model when directly presented with the value exchange — and thus the privacy tradeoff — offered with these services. 

These findings reframe the privacy pragmatist and call her influential status in U.S. research, industry practice, and policy into serious question. Under the new view, she cannot be seen as “pragmatic” at all, but rather as a consumer making choices in the marketplace with substantial deficits in her understanding of business practices. This likewise calls into question policy decisions based on the segmentation model and its assumptions. We conclude that updated research and a policy approach that addresses both rationality and knowledge gaps are key.

Vetting

The Canberra Times, drawing on figures from Australian Government Security Vetting Agency (AGSVA), reports that "Almost all federal government staff, even those in menial jobs, are now security vetted, a costly requirement once reserved for a select few".

Supposedly some 350,000 people have an active Commonwealth security clearance, including public servants, defence personnel and contractors that range from plumbers to the Parks Australia taxonomy adviser in Kakadu National Park.

The CT claims that as of May 2013 there were

• 9,806 active security clearances with 'positive vetting' (access to the most sensitive information), 
• 31,199 with 'Negative vetting 2' (formerly top secret), 
• 124,569 with 'Negative vetting 1' (highly protected, secret) and 
• 181,305 with 'Baseline' (confidential, restricted and protected).

ANAO criticisms of AGSVA performance are noted here.

Transparency

'The Transparency Paradox: A Role for Privacy in Organizational Learning and Operational Control' by Ethan S. Bernstein in (2012) 57(2) Administrative Science Quarterly 181-216 offers another perspective on the 'wearables' findings noted in the preceding post.

Bernstein states [PDF] that

Using data from embedded participant-observers and a field experiment at the second largest mobile phone factory in the world, located in China, I theorize and test the implications of transparent organizational design on workers’ productivity and organizational performance. Drawing from theory and research on learning and control, I introduce the notion of a transparency paradox, whereby maintaining observability of workers may counterintuitively reduce their performance by inducing those being observed to conceal their activities through codes and other costly means; conversely, creating zones of privacy may, under certain conditions, increase performance. Empirical evidence from the field shows that even a modest increase in group-level privacy sustainably and significantly improves line performance, while qualitative evidence suggests that privacy is important in supporting productive deviance, localized experimentation, distraction avoidance, and continuous improvement. I discuss implications of these results for theory on learning and control and suggest directions for future research.

Bernstein comments

Organizations’ quest for worker productivity and continuous improvement is fueling a gospel of transparency in the management of organizations (e.g., Hood and Heald, 2006; Bennis, Goleman, and O’Toole, 2008). Transparency, or accurate observability, of an organization’s low-level activities, routines, behaviors, output, and performance provides the foundation for both organizational learning and operational control, two key components of productivity that Deming (1986) identified. As an antecedent to enhanced organizational learning, transparency may improve some of the processes that scholars have shown to be important. For example, it may improve one unit’s access to the expertise, experience, and stored knowledge of another (Hansen, 1999), thereby creating the potential to increase the quantity and quality of knowledge transfer (Argote et al., 2000) and shared understanding (Bechky, 2003), accelerate organizational learning curves (Adler and Clark, 1991), or increase network ties for the exchange of knowledge related to learning before doing (Pisano, 1994). Similarly, it could neutralize the skewing effects of impression management (Rosenfeld, Giacalone, and Riordan, 1995), facades of conformity (Hewlin, 2003), or organizational silence (Morrison and Milliken, 2000) on meaningful information flows up the organization, as well as reduce the risk that localized problem solving will fail to contribute to organization-wide learning (Tucker, Edmondson, and Spear, 2002). Transparency concurrently may enable operational control by ensuring access to richer, more extensive, more accurate, more disaggregated, and more real-time data by managers and employees, thus improving both hierarchical control (Taylor, 1911; Adler and Borys, 1996; Sewell, 1998) and peer control (Barker, 1993). Senior leaders are therefore redesigning their organizations to make more work more visible more of the time, embracing innovations such as advancements in surveillance and knowledge search technologies (Sewell, 1998; Levinson, 2009), open workspace design (Zalesny and Farace, 1987), and “naked” communication of real-time data via advanced information technology tools (Tapscott and Ticoll, 2003).

This trend toward transparency has been particularly evident in the design of the world’s factories, where visual factory implementations have been “spreading . . . like a trail of gunpowder” (Greif, 1991: 1). Most modern-day facilities are designed to provide near-perfect observability of the actions and performance of every employee, line, and function. This observability serves as an important foundation for all aspects of the Toyota Production System DNA (Spear and Bowen, 1999) and is a necessary antecedent behind the seventh principle of the Toyota Way: “use visual control so no problems are hidden” (Liker, 2004: 149–158). Factory managers and employees need to see activity in order to improve it. Accurate observability also provides the basis for many of the widely accepted practices in total quality management (TQM) implementations (Hackman and Wageman, 1995), which target simultaneous improvements in both learning and control (Sitkin, Sutcliffe, and Schroeder, 1994). An emergent logic about the relationship between observability and performance has thus become dominant in theory and practice: organizations “that are open perform better” (Tapscott and Ticoll, 2003: xii).

Nonetheless, the implications for organizational performance of increased transparency remain surprisingly unstudied, both in factories and more broadly. Without sufficient empirical, field-based evidence of a causal relationship between observability and performance, uncritical assumptions about that relationship have germinated (Hood and Heald, 2006). Rarely does one hear about any negative effects of transparency or problems stemming from too much transparency. There are, however, reasons to be skeptical that transparency is such a panacea: detailed field work from the long tradition of factory floor research in management science has documented instances in which observability has encouraged hiding behavior among organization members (Roy, 1952; Dalton, 1959; Burawoy, 1979; Hamper, 1986), producing only the appearance of enhanced learning and control without real benefits to organizational productivity, continuous improvement, and performance.

Dalton (1959: 47) described how managers, mandated by their superiors to conduct “surprise inspections,” instead chose to “telephone various heads before a given inspection telling them the starting point, time, and route that would be followed” so that each inspection would simply “appear to catch the chiefs off-guard.” Roy (1952) and Burawoy (1979), in reconfirming the “restriction of output” observations in the Bank Wiring Observation Room at the Hawthorne Works (Mayo, 1933; Roethlisberger and Dickson, 1939), provided substantial detail on the “quota restriction” and “goldbricking” activities in the Greer machine shop (Roy, 1952), which only became worse when managers were in sight (Roy, 1952; Burawoy, 1979). Subsequent insider tales from one of General Motors’ largest and most open plants portrayed management’s stance on various workarounds like “doubling up” as “a simple matter of see no evil, hear no evil,” leaving workers with the challenge of hiding their self-defined “scams” within the context of an observable factory floor—the more observable the factory floor, the more effort “wasted” on hiding them (Hamper, 1986: xix, 35). Each of those facilities was designed to be extremely transparent, yet those organization designs with high observability resulted not in accurate observability but, rather, only in an “illusion of transparency” (Gilovich, Savitsky, and Medvec, 1998)—a myth of control and learning—maintained through careful group-level behavioral responses by those being observed. Although observability was achieved through the removal of physical barriers like walls, accurate observability (transparency) was not. Goffman (1959) originally suggested that increasing the size and salience of an “audience” has the tendency to reduce sincerity, and to increase acting, in any “performance.” Analogously, increasing observability in a factory may in fact reduce transparency, which is displaced by illusory transparency and a myth of learning and control, by triggering increasingly hard-to-detect hiding behavior—a result I term the “transparency paradox.”

To untangle the transparency paradox, this paper presents a behavioral model of observability in organizational design, based on both qualitative and experimental field data, in an empirical setting that uniquely allowed me to investigate transparency within the locus of organizational experience and performance. I studied workers at the mobile phone factory of “Precision” (a pseudonym) in Southern China, which was the second largest mobile phone factory in the world at the time. Over the past century, factory studies have been central to building the foundations of organizational theory (e.g., Taylor, 1911; Roethlisberger and Dickson, 1939; Roy, 1952, 1960); however, I chose these workers not because of the type of work they did or because they worked in the epicenter of Chinese outsourced manufacturing but, rather, because organizational life for them was extremely transparent, in both actions and performance. In accordance with best practices for visual factory design (Greif, 1991) and TQM (Hackman and Wageman, 1995), visibility was everywhere. There was a clear line of sight across factory floors, each football fields long, such that learning could be quickly captured, distributed, and replicated by managers. Hat color signaled organizational role, function, and rank, such that expertise could be visibly sought when needed. Both output and quality were constantly monitored via very visible end-of-line whiteboards, factory floor computer terminals, and real-time reports to management and customers worldwide. If ever there were an organizational context in which existing practice demanded transparency, this factory in Southern China was the epitome, and management had implemented the best existing transparency tools with great diligence and success. I, in contrast, inductively explored the workers’ behavioral responses, at both the individual and group level, to such stark transparency, while simultaneously controlling for any Hawthorne effects—circumstances in which subjects improve the aspect of their behavior being experimentally measured simply in response to the fact that they are being studied, not in response to any experimental manipulation (Mayo, 1933; Roethlisberger and Dickson, 1939). I use the resulting qualitative participant-observer field data in Study 1, and the empirical field experiment it informed in Study 2, to challenge some of the current, blanket assumptions about the value of transparency for productivity and organizational learning and construct a contingent, behavioral model of the relationship between organizational transparency and learning, control, and performance.

He concludes

We typically assume that the more we can see, the more we can understand about an organization. This research suggests a counteracting force: the more that can be seen, the more individuals may respond strategically with hiding behavior and encryption to nullify the understanding of that which is seen. When boundaries to visibility fall, invisible boundaries to accurate understanding may replace them at a significant cost. In this research, that cost was a 10–15 percent detriment to performance.

Hence the transparency paradox: broad visibility, intended to increase transparency, can breed hiding behavior and myths of learning and control, thereby reducing transparency. Conversely, I have observed that transparency can actually increase within the boundaries of organizational modules, or what the operators called zones of privacy, when the visible component of transparency is decreased or limited between them.

This paper does not challenge the value of transparency. Instead, it challenges what, and how much, individual observers should see in order to achieve it. Because the mere presence of a manager, in line of sight of an employee, may affect employee performance in negative ways, management by walking around may sometimes be inferior to management by standing still. In this study, creating zones of privacy around line workers’ activities did not result in slacking off or cutting corners. Instead, the zones of privacy improved transparency within the line and, with it, improved productive deviance, experimentation, and focus on productive work. While hourly defect-free production results remained transparent to all via the IT system, line activities remained visible only to those who were best suited to innovate: the line operators. The establishment of a zone of privacy around the line allowed improvement rights to be owned by those on the inside, encouraged more transparency within the visibility boundaries, and ultimately enabled an increase in organizational performance. Visual privacy is an important performance lever but remains generally unrecognized and underutilized. Paradoxically, an organization that fails to design effective zones of privacy may inadvertently undermine its capacity for transparency.

Implantables and Wearables

'Digital Medicine, the FDA, and the First Amendment' (MSU Legal Studies Research Paper No. 12-08) by Adam Candeub comments 

Digital medicine will transform healthcare more fundamentally than the introduction of anesthesia or the discovery of the germ basis of infectious disease. Inexpensive computerized DNA sequencers will allow practitioners to individualize drugs and treatments. Digitalization will "democratize medicine," enabling individuals to create and use their own medical data, even diagnose or treat themselves. Already, tens of thousands of "medical apps" are available for smartphones that can do everything from take echocardiograms, blood pressure, pulse, lung function, oxygenation level, sugar level, breathing rate and body temperature to diagnose skin cancer and analyze urine. Medical apps, aimed at practitioners but available all, such as Isabel, diagnose diseases.

In fall 2013, the Federal Drug Administration (FDA) has asserted regulatory authority over mobile medical applications and other digital medical services, threatening, to chill, if not, destroy this innovation — and guaranteeing lengthy, high profile litigation in the near future. This article argues that the FDA stands on firm legal ground regulating medical devices that invasively measure bodily functions or take physical specimens. On the other hand, the FDA’s exercise of jurisdiction over applications that simply process information, such as Isabel, or use approved medical devices to provide medical information, like 23andMe, a genome analysis firm which the FDA recently shut down in a high profile action, raise legal concerns. Because these medical applications simply process information, they stand beyond the FDA’s regulatory reach under the Food, Drug and Cosmetics Act and the Administrative Procedure Act.

This paper adds to the large debate on the First Amendment, information and computer code. Building on recent Supreme Court decisions, this paper shows how code and applications which create healthcare information are protected speech. Given digital applications’ capacity to produce pools of data which researchers can mine for clinical and epidemiological insights and given government funding of medical services, healthcare data is both scientific and political speech, deserving of full First Amendment protection.

'Cleaning House: The Impact of Information Technology Monitoring on Employee Theft and Productivity' [PDF] by Lamar Pierce, Daniel Snow and Andrew McAfee considers

how investments in technology-based employee monitoring impact both misconduct and productivity. We use unique and detailed theft and sales data from 392 restaurant locations from five different firms that adopt a theft monitoring information technology (IT) product. Since the specific timing of individual locations’ technology adoption is plausibly exogenous, we can use difference-in-differences models to estimate the treatment effect of IT monitoring on theft and productivity within each location for all employees. We find significant treatment effects in reduced theft and improved productivity that appear to be driven by changing the behavior of individual workers rather than selection effects. Although workers with past patterns of theft appear more likely to leave treated locations than others, individual behavioral changes by existing workers drive restaurant-level improvements. These findings suggest multi-tasking by employees under a pay-for-performance system, as they increase effort toward sales following monitoring implementation in order to compensate for lost theft income. This suggests that employee misconduct is primarily a result of managerial policies rather than individual differences in ethics or morality.

The authors comment

Employee theft and fraud are widespread problems in firms, with workers stealing roughly $200 billion in revenue from U.S. firms to supplement their income (Murphy 1993). A growing empirical literature on forensic economics has clarified when and how theft and other misconduct occur (e.g., Jacob and Levitt 2003; Fisman and Wei 2009; Zitzewitz 2012a), but says little about the overall impact of firms’ use of forensics to monitor and reduce theft. This is a critical shortfall in the literature, given the substantial investments made by firms in monitoring employees (Dickens et al. 1989), as well as the growing forensic and monitoring capabilities enabled by information technology (IT) systems. This raises two important yet unanswered questions about the economic impact of monitoring employee crime. First, if monitoring is indeed effective in reducing theft, as theory (Becker 1968; Dickens et al. 1989) and some evidence (Nagin et al. 2002) suggests, do these gains primarily result from changing worker behavior or instead from replacing less honest workers with more honest ones? Second, if increased monitoring reduces theft of existing workers, how do they adjust effort on other tasks in response to this lost income, and what is the overall impact on firm productivity? Recent research on corruption suggests that reducing one type of misconduct through monitoring might invoke a multitasking response that increases other corrupt activities that substitute for lost income (Olken 2007; Yang 2008).

In this paper we address these questions by examining the impact of improved theft monitoring from information technology in the American casual dining sector, using a unique dataset that details employee-level theft and sales transactions at 392 restaurants in 38 American states. We focus on this setting for several reasons. First, detailed theft and sales data allow us to identify specific worker-level productivity, theft, and sorting responses to changes in firm monitoring. Second, unlike previous research on monitoring (e.g. Duflo et al. 2012; Zitzewitz 2012b), restaurants provide a firm-based setting where workers receive commission-based pay-for-performance compensation that incentivizes substitution from the monitored task (theft) to the unmonitored and productive one (sales). Third, the increased monitoring in our setting results from the staggered implementation of improved IT monitoring systems across multiple locations. Although the impact of IT on productivity increases in firms is well documented (David 1992; Brynjolfsson 1993; Grilliches 1994; Nordhaus 2001; Bharadwaj 2000; Bresnahan et al 2002), no research examines potential productivity gains through reduced theft or other misconduct. Recent work by Bloom, Sadun, and Van Reenen (2012) shows that the productivity gains from IT have been most substantial in industries, such as restaurants, that have “tougher” human resource practices with higher-powered incentives.

We conceptualize the employee theft issue as a stylized multitasking problem (e.g., Holmstrom and Milgrom 1991), where workers under a pay-for-performance scheme (such as tips) can derive earnings from two tasks: sales productivity and theft. Earnings from each task are increasing and concave in effort. The cost of effort from each task is convex and increasing, but theft bears two additional costs. First, the employee will be detected and punished by management (the principal) with some probability p that is increasing in theft. Second, the employee may suffer moral or ethical costs based on identity or preferences that make theft costly even when it is effortless and unmonitored (e.g. Akerlof and Dickens 1982; Mazar et al. 2009; Bénabou and Tirole 2011; Dal Bó and Terviö 2013).

Such a setup has three immediate implications for the impact of increased IT monitoring on employee effort allocation. First, any employee with existing non-zero theft levels will reduce effort allocated to theft in response to increased monitoring by management. Second, the resulting decrease in earnings will thus motivate them to increase effort allocated toward productivity. Third, employees with existing non-zero theft levels will be more likely to leave the firm as outside employment options become relatively more attractive than before.

We use approximately two years of detailed theft and sales data from 392 restaurant locations from five restaurant firms (hereafter referred to as “chains”) that adopt an IT monitoring product, NCR Corporation’s Restaurant Guard, that reveals theft by specific employees. Restaurant servers (also called waiters) use multiple techniques to steal from their employers and customers, including voiding and “comping” sales after pocketing cash payment from customers, and transferring food items from customers’ bills after they have paid. Restaurant Guard alerts managers to egregious examples of these actions in a weekly report. These alerts represent the “tip of the theft iceberg”, since the product is designed to identify instances of theft that are so obvious as to be indefensible by servers. Consequently, while the weekly alerts in our data average only $108 per location, interviews with managers indicate the losses to be considerably larger.

Our data provide the identity of each server, as well as the revenue, theft alerts, tips, shifts, and food items sold for each day. The data also provide the date on which Restaurant Guard was implemented at each location. The Restaurant Guard product was rolled out to individual store locations in a plausibly piecemeal way not related to individual store needs or theft levels. Rather, the rollout pattern was driven by the schedule and week-to-week geographic location of the vendor’s Restaurant Guard implementation team. This rollout strategy allows us to treat adoption dates as plausibly exogenous to the individual restaurant location and not correlated with revenue or theft levels. Our quasi-experimental setting thus enables us to estimate behavioral and productivity changes within each location across all employees. We use difference-in-differences models to estimate the treatment effect of the monitoring technology on theft, sales productivity, employee turnover, and other performance metrics at both the individual and restaurant level. The different implementation dates for each location allow us to control for time trends and time-invariant location-specific and worker-specific fixed effects.

Our empirical models identify a 22% (or $24/week) decrease in identifiable theft after the implementation of IT monitoring. This treatment effect is persistent, with the magnitude growing from $7 in the first month to $48 in the third month. The treatment effect on total revenue, however, is much larger. Total revenue increases by $2,975/week (about 7% for the average location) following implementation of Restaurant Guard, suggesting either a considerable increase in employee productivity or a much larger latent theft being eliminated by the IT product. Furthermore, the implementation of Restaurant Guard increases drink sales (the primary source of theft) by $927/week (about 10.5%). This result is particularly important because the profit margins on drinks in casual dining are between 60 and 90 percent, representing approximately half of all restaurant profits. Furthermore, we observe an increase in average tip levels of 0.3%, which represents one sixth of a standard deviation improvement from a base rate of 14.8%. This result suggests improvement in customer service from IT monitoring.

While these results show considerable impact on theft, revenue, and profitability for the restaurants, they do not explain the mechanisms through which these improvements are gained. To disentangle these mechanisms, we examine the impact of the IT product on individual employee outcomes. We employ a similar difference-in-differences approach, alternatively including worker and restaurant fixed effects to examine whether our results are due to behavioral changes in existing workers or selection effects as the worst workers leave the restaurants (e.g. Lazear 2000; Hamilton et al. 2003).

These individual worker models show that Restaurant Guard reduces average hourly theft by between $0.05 and $0.06 in both models. This suggests that all the decrease in theft found in our restaurant-level models can be explained by employees changing their behavior, as opposed to a change in the group of employees working at the restaurant. We also find that IT monitoring also increases hourly sales by $2.02 for existing workers, with similar increases for drink sales and tip percentage. In each case, the worker fixed models suggest behavioral changes by workers rather than a selection effect. Given the pay-for-performance compensation policy of our restaurants, these results are consistent with multi-tasking and principal-agent models of worker behavior (Alchian and Demsetz 1972; Holmstrom and Milgrom 1991). When a worker’s ability to gain money from theft is reduced due to increased monitoring, he or she reallocates effort toward increasing sales and customer service in order to regain some of that loss.

Finally, our models shed light both on how management responds to the new theft information and on workers’ endogenous choices to leave the firm. To do so, we separate workers into “known thieves” and “unknown” groups based on their observed (by the researchers, not by the managers) pre-treatment theft. Known thieves are those with observable pre-treatment theft. Cox hazard models show employees with known pre-treatment theft levels have higher attrition rates than do employees without observable theft. The observation that these exits are unlikely to happen within two weeks of a theft report to management suggests that this attrition is voluntary and not due to termination following theft revelation to management. This voluntary attrition by thieves following increased monitoring is consistent with workers selecting out of jobs after monitoring limits theft income. The apparent rarity of termination also echoes Dickens et al.’s (1989) observation that firms infrequently employ the efficient low-monitoring, high-punishment crime deterrence strategy described in Becker (1968). We also observe that while known thieves’ weekly hours remain unchanged following the IT implementation, other workers’ weekly hours increase on average by 2.25 hours, which is consistent managers reallocating the hours toward more honest workers.

This paper has implications for several important research streams. First, we contribute to the literatures on forensic economics and corruption. Only a few studies focus on explicitly illegal behavior by employees of private firms, and those that do almost exclusively rely on empirical evidence aggregated at the firm level (Fisman and Wei 2004; 2009; Zitzewitz 2006; Heron and Lie 2007; DellaVigna and La Ferrara 2010; Chen and Sandino 2012; Pierce and Snyder 2012).8 Our worker-level data, like Nagin et al.’s (2002) study of call center fraud, allow us to disentangle firm-level misconduct from individual-level decisions that run counter to firm profitability. Unlike their work, however, our multi-firm longitudinal data allow us to more comprehensively examine the impact of monitoring on selection and treatment across multiple tasks, including productivity. Our results show that employee productivity and misconduct are linked through organizational policies such as compensation or information technology monitoring. This unique finding is particularly important because it has roots in foundational models of compensation that allow for both productivity and sabotage (Lazear 1989).

Our results also contribute to work in personnel and organizational economics on employee response to compensation systems. While theory modeling counterproductive employee behavior is extensive (Alchian and Demsetz; Jensen and Meckling 1976; Holmstrom 1979; Lazear and Rosen 1981; Holmstrom and Milgrom 1991), only recently has empirical work examined incentives impact explicitly illegal behavior in firms. A growing literature on bonus gaming examines employees’ strategic responses to incentive systems (e.g. Oyer 1998), but these behaviors are not clearly corrupt or illegal. The fundamental difference between counter-productive and explicitly illegal behaviors goes beyond standard principal-agent and multi-tasking models because effort allocated toward illegal behaviors not only indirectly hurts the firm through foregone production, but also directly hurts the firm through such costs as stolen revenue and legal liability. Furthermore, our study suggests that the effort that workers allocate toward corrupt or illegal behavior can be redirected toward more productive behavior through incentives. Interventions can simultaneously reduce theft and improve productivity, a result that to the best of our knowledge has not been observed in the field.

Finally, we contribute to the literature showing the impact of technology on productivity (Brynjolfsson 1993; Brynjolfsson and Hitt 1996; David 1992; Griliches 1994; Athey and Stern 2000; Nordhaus 2001). One of the key findings from this research has been the impact of IT on labor productivity growth (Jorgenson and Stiroh 2000; Oliner and Sichel 2000). While other studies show that IT can also improve productivity by reducing mild forms of misconduct such as shirking and absenteeism (Hubbard 2000; Baker and Hubbard 2003; Duflo et al. 2012), our paper is the first to show both the direct impact in reducing explicitly illegal behavior such as theft as well as the secondary effect of incentivizing increased productivity. Furthermore, our paper supports the view that the impact of IT systems is intimately tied to other elements of firm policy such as asset ownership (Baker and Hubbard 2003; Rawley and Simcoe 2013), human resource policy (Bloom et al. 2012), and other organizational practices such as products and services (Bresnahan et al. 2002). The impact of IT monitoring on sales and customer service increases in our setting is likely dependent on the tip-based compensation system that incentivizes wait staff to increase productivity after theft is constrained by monitoring.