Abstract
This paper argues that consumer demand for unethical behavior such as fraud can impact employee turnover through market and psychological forces. Widespread conditions of unethical demand can improve career prospects for employees of unethical firms through higher income and stability associated with firm financial health. Similarly, unethical employees enjoy increased tenure from the financial and psychological rewards of prosocial behavior toward customers demanding corrupt or unethical behavior. We specifically examine the well-documented unethical demand for fraud in the vehicle emissions testing industry, and its impact on employee tenure. We use data from tests conducted by several thousand licensed inspectors to demonstrate that fraudulent employees and employees of fraudulent firms enjoy longer tenure. These results suggest further work to separate the multiple psychological and economic mechanisms likely driving our findings.
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Notes
It is important to note that we do not argue that all fraud is necessarily unethical., Snyder (2010) for example, finds that doctors’ fraudulent use of intensive care units to procure transplant livers was likely motivated by concern for the patient, was used to protect the patient from other doctors’ misrepresentation, and had no observable social welfare cost in driving patient mortality.
Pierce and Snyder (2012) use the same data as this paper.
The economics and sociology literatures typically refer to fit as “match”.
One can choose any cutpoint to define the categories that is theoretically justified, although it is important to adjust the cutpoint to assure that empirical findings are robust to this choice. While we will use 50 % as our cutpoint, we will also show that our results hold for other choices.
We will interchangeably use the fraudulent/strict dichotomy with the lenient/strict dichotomy throughout the paper.
It is important to note that Edwards (1994) introduces a number of specifications targeted toward specific hypotheses.
If a driver has a registered vehicle weighing less than 8500 lbs., they must get it tested for hydrocarbons (HC), carbon monoxide (CO), and nitrogen oxide (NOx). If their car is newer than 1981, they must choose a testing station at which to conduct the test. These testing facilities will be private companies, but will be licensed by the state. Vehicles will receive one of two tests: dynamometer and idle. In the idle test, the probe is inserted into the tailpipe while the car engine idles. This test is much easier to pass, as it doesn’t measure NO x levels. The dynamometer test measures exhaust at different engine RPM's.
While such investigations are effective in some contexts (e.g., Levine et al. 2012), discussions with the state agency suggest that covert audits are very rare, due to the unwillingness of state workers to participate in them.
Choosing a sample smaller is problematic for the reason that one cannot precisely estimate the true pass rate of a firm or individual inspector. For example, suppose that a particular inspector passes 90 % of the vehicles they see. If the sample size of inspections were 100, then over 40 % of the time we would observe a pass rate greater than 92 % or less than 88 %. With a sample size of 500 this percentage drops to less than 3 %. Nevertheless, our results are robust to changes in the sample size as documented in Appendix Table 6.
Because we are using the 2 × 2 construct, we have to use seemingly arbitrary cutoffs. In unreported analysis—we verify that the choice of the cutoff threshold is not driving the results.
Again, we note that the 50 % cutoff is consistent with evidence on actual fraud rates in this industry, but also that our results are robust to alternative cutoffs.
We operate under the assumption that if the employee was with the facility during the last month of the sample that they stayed with the firm. If the employee is not with the firm during the last month of the sample the date of separation is the last inspection performed by the employee at the facility.
Since the model is non-linear the interpretation of the interaction enters the equations non-linearly. Because the effect size is so small this is not substantively relevant in this case. We have run this as an OLS regression with both total tenure at the station and probability the inspector leaves the station as the dependent variable and found substantively similar results.
In unreported results we use a continuous leniency variable. We find substantively similar results to those in Table (5).
These results are available from the authors on request.
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Pierce, L., Snyder, J.A. Unethical Demand and Employee Turnover. J Bus Ethics 131, 853–869 (2015). https://doi.org/10.1007/s10551-013-2018-2
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DOI: https://doi.org/10.1007/s10551-013-2018-2