American Economic Association

White-Collar Crime Writ Small: A Case Study of Bagels, Donuts, and the Honor System
Author(s): Steven D. Levitt
Source: The American Economic Review, Vol. 96, No. 2 (May, 2006), pp. 290-294
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/30034660
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 White-CollarCrimeWritSmall:A Case Study of Bagels,
Donuts,and the HonorSystem
By STEVEND. LEVITT*
For more than a decade, an MIT-trained
economist has meticulouslyrecordedthe results
of nearly 75,000 deliveries of bagels and donuts
to corporate offices. These bagels and donuts
are left in workplaces in the morning, along
with a list of prices and a lockbox. Office work-
ers purchasethe productson the honor system.
Later that day, the uneaten goods and the lock
box are collected and the relevantdata for each
office are recordedin a spreadsheet.These data
provide a unique opportunityfor understanding
the extent to which individualsbehave honestly
in this setting and the factors that influence the
level of honesty.
An analysis of the discrepancy between the
prices of the goods consumed and the actual
payments deposited in the lock box yields a
numberof insights. First, the base paymentrate
is quite high. On average, payments represent
almost 90 percent of the posted price. In a
model of pure self-interest, one would expect
very low payment rates, because there would
seem to be many opportunitiesfor individuals
to take the products with almost no chance of
their nonpayment being detected.' Moderating
the tendency to take the productswithout pay-
ing is the fact that low payment rates will in-
crease the probability the delivery company
stops serving the company. Paying for one's
bagels and donuts, viewed in this light, is a
public good for other office workers.Thus, one
might expect a strong negative relationshipbe-
tween office size and payment rates, which is
*
Department of Economics, University of Chicago,
1126 E. 59th Street, Chicago, IL 60637 (e-mail: slevitt
@uchicago.edu). I would like to thank Paul Feldman for
generouslysupplyingboth the datasetused in this paperand
a great deal of his time in helping me understandthe data.
Gary Becker, Austan Goolsbee, John List, Kevin Murphy,
and Stephen Dubner provided helpful comments and dis-
cussion. Andrew Francis, MarinaNiessner, and Will Segal
provided outstandingresearch assistance.
1 Indeed, when the delivery company's founder told his
economist friends about his business idea, they predicted
that his payment rate would be far below what would be
requiredto cover costs.
290
not present in the data. Rather,the data appear
more consistentwith a model in which there are
internal, nonpecuniary costs associated with
stealing the bagels and donuts,i.e., people over-
whelmingly pay for the products because it
would be wrong not to do so.2
The observed payment rates are systemati-
cally related to a variety of observable factors.
For instance, payment rates fall in response to
increases in the posted price. This is consistent
with the increase in financial costs pushing
some marginalconsumersto be willing to sus-
tain the moral cost associated with not stealing
the goods or paying less than full price.3 Pay-
ment rates are higher when many of the bagels
and donuts go uneaten,suggesting that the mar-
ginal consumerpays a lower shareof the posted
price thanthe inframarginalconsumer.Purchas-
ers of donuts appear to be more likely to pay
less than the full price. There is a sharp and
persistent increase in the payment rate follow-
ing the September 1 th terroristattacks.
I. The Data
The data used in this analysis reflect almost
75,000 bagel and donutdeliveries made to com-
pany offices over the 12-yearperiod from 1993
to 2004. In all cases, the goods are delivered in
the morning, along with a list of prices and a
lockbox into which customers make payments
on the honor system. Later that day, the lock-
box and uneaten bagels and donuts are re-
trieved. For each delivery, information is re-
2
See Levitt andJohn List (2005) for one such model and
a discussion of examples of earlier work on this subject.
3 It is also
possible that the decline in the payment rate
with a price increaseis evidence of social preferencesalong
the lines of Matthew Rabin (1993) and Ernst Fehr and
Simon Gaichter(2000). The fact that the lower payment
rates appearto be a permanentratherthan temporaryphe-
nomenonmakes the gift exchange story less plausible, since
the fairness of the transaction is likely to be tied to a
reference point for the transaction,and one would expect
that the reference point for the transactionwould evolve
toward the currentprice.
VOL.96 NO. 2 EXPOSINGCHEATINGAND CORRUPTION
FIGURE 1. RAW PAYMENT RATES OVER TIME
corded regarding the number of bagels and
donuts delivered, the number of each product
eaten, the posted prices, and the total amountof
money in the lockbox.4 Working with the de-
livery company, we have classified each office
receiving bagels and donuts into broadindustry
classifications (e.g., defense, telecommunica-
tions, software, informationtechnology). These
data have been supplementedwith meteorolog-
ical data from the National Climatic Data Cen-
ter and unemployment statistics from the
Bureau of Labor Statistics for the metropolitan
area in which the deliveries are made.
Figure 1 presents the time series of payment
rates thatthe bagel and donut delivery company
receives, where the payment rate is defined as
the ratio of revenues actually received to the
revenue that would be expected if the listed
price had been paid for each bagel or donut
taken.The datapoints reflect monthly averages,
with each customer given equal weight.5 Pay-
ment rates are initially above 91 percent,falling
to 87 percent over a period of three to four
years. Payment rates fluctuatearoundthis level
until September2001 (demarcatedin the figure
with a vertical line), at which point they rise
sharply and remain elevated for most of the
remainderof the period analyzed.Also noted in
Figure 1 is the timing of the three nominalprice
increases contained in the data. Initially, the
price of a bagel (including cream cheese) was
4 Also excluded from the dataset are a small numberof
observations which appear to reflect data entry errors or
unusual events (e.g., office parties).
5 Our unit of analysis is a delivery to an office. To give
individual customers equal weight in the analysis, we
weight each office-level observationby the total numberof
bagels and donuts delivered that day.
291
60 cents and the price of a donut was 50 cents.
The bagel price was raised from 60 to 75 cents
in 1993, from 75 to 85 cents in 1998, and from
85 cents to one dollar in 2003.6 There is some
visual evidence suggesting that payment rates
decline in the weeks following bagel price in-
creases. The nominal price of a donut remains
fixed at 50 cents over the entire sample period.
The average paymentrate over the sample is
88.7 percent. Overall, fewer donuts are deliv-
ered than bagels, althoughthe proportionsvary
widely across companies. On average, more
than 90 percent of the combined bagels and
donuts delivered are taken. To control for sea-
sonality, the year is divided into four three-
month seasons. Winter is defined as January
through February, Spring is March through
May, etc.7 We captureweather fluctuationsus-
ing three dummy variables.The variables"hot"
and "cold" are indicatorvariables equal to one
for the 10 percentof observationsin our sample
with the hottest and coldest average tempera-
tures, respectively. The precipitationvariableis
set equal to one if there is more than 0.1 inches
of precipitationin a day. We include indicator
variables representing deliveries made in the
week preceding and following major holidays
(Thanksgiving,Christmas,New Year's) and all
other holidays. Companies are distributed
across 11 industrycategories, with information
technology the most common category.
II. The EmpiricalDeterminantsof Payment
Rates
To analyze the factors thatinfluencepayment
rates, I estimate specificationsof the form
(1)
PaymentRatect = X',B + W:F + Z'lf + ec6
6
In the regressions, I use the nominal rather than real
price of bagels. Inflationrates were quite stable over this
time period (regressingthe consumerprice index on a time
trend yields an R2 of 0.9799), so including a linear time
trend (as we do in some specifications) is very much like
reportingprices in real dollars. The real price of a bagel at
the end of the period is 27 percenthigher than at the startof
the period.
7 Withinthese seasons, we cannotreject the null hypoth-
esis of equal values across the three months comprisingthe
season in the regression analysis that follows.
292 AEA PAPERSAND PROCEEDINGS MAY2006

where c and t correspond to companies and TABLE 1-DETERMINANTSOF THEPAYMENTRATE

dates. There are two variables (denoted X in
Dependent variable:payment rate
equation (1)) that vary by company and day:
donuts as a percentage of the delivery and the (1) (2) (3) (4)

fraction of the product in the delivery that is Price of a bagel -0.0154 -0.0427 -0.0493 -0.0735
(0.0058) (0.0109) (0.0110) (0.0104)
returneduneaten. A number of the regressors +
Donuts eaten/(donuts bagels -0.0178 -0.192 -0.0223 -0.0361

vary with time, but not across companies on a eaten) (0.0028) (0.0029) (0.0029) (0.0052)
% of delivery that goes uneaten 0.0683 0.0679 0.0676 0.0468
particularday. These include the bagel price, Monday
(0.0051) (0.0051) (0.0051) (0.0052)
0.0010 0.0015 -0.0038 0.0025
weather and holiday variables, the unemploy- (0.0061) (0.0061) (0.0061) (0.0066)
0.0052 0.0049 0.0048 0.0020
ment rate, season indicators,a time trend,and a Wednesday
(0.0012) (0.0011) (0.0012) (0.0020)
dummy variablecapturingwhetherthe delivery Thursday 0.0041
(0.0015)
0.0039
(0.0015)
0.0000
(0.0015)
-0.0027
(0.0033)
is before or after the 9/11 terroristattacks. Fi- Friday 0.0177 0.0176 0.0106 0.0110
(0.0013) (0.0012) (0.0014) (0.0045)
nally, there is a set of company-specific vari- Spring 0.0059 0.0053 0.0051 0.0044
ables that are not time varying: the size of the Summer
(0.0016)
-0.0026
(0.0016)
-0.0006
(0.0016)
-0.0005
(0.0015)
0.0002
first delivery (our proxy for the numberof peo- (0.0017) (0.0017) (0.0017) (0.0016)
Fall 0.0042 0.0032 0.0030 0.0031
ple working in the office) and the industry. In (0.0015) (0.0016) (0.0016) (0.0015)
Log (size of first delivery) -0.0116 -
some specifications, we also include company- -0.0118
(0.0045) (0.0045)
-0.0100
(0.0046)
fixed effects, which absorball of the variationin Hot -0.0015 -0.0021 -0.0023 -0.0021
(0.0017) (0.0016) (0.0017) (0.0016)
these fixed company characteristics.All regres- Cold -0.0011 -0.0002 -0.0003 0.0001
sions are estimatedusing weighted least squares Rainy
(0.0018)
0.0002
(0.0018)
0.0005
(0.0018)
0.0006
(0.0016)
0.0001
with weights given by the combined numberof (0.0011) (0.0011) (0.0011) (0.0011)
Unemploymentrate 0.0152 0.0065 0.0048 0.0014
bagels and donuts delivered. Standarderrorsare (0.0008) (0.0016) (0.0016) (0.0016)
Before major holiday -0.0034 -0.0049 -0.0050 -0.0042
clusteredby date, except for those measuresthat (0.0032) (0.0033) (0.0033) (0.0033)
do not vary by company,which are clusteredby After major holiday -0.0070 -0.0073 -0.0073 -0.0067
((0.0032) (0.0031) (0.0030) (0.0029)
company. Before minor holiday -0.0070 -0.0073 -0.0073 -0.0067
(0.0013) (0.0013) (0.0013) (0.0012)
The results are presented in Table 1. In all After minor holiday -0.0041 -0.0033 -0.0031 -0.0026
cases, the dependent variable is the payment Time trend (x 1000)
(0.0013)
-
(0.0013)
-0.0093
(0.0013)
-0.0092
(0.0012)
-0.0040
rate, i.e., the ratio of money left in the lock box -
(0.0025) (0.0025) (0.0026)
Post 9/11/2001 0.0210 0.0188 0.0083
to the amount that would be expected if the (0.0034) (0.0034) (0.0033)
Telecom - - -0.0319
posted prices were received for each bagel and (0.0169)
donuttaken.The numberof controlsincludedin Government - - 0.016 -
(0.0119)
the regression increases moving from left to Biotech - - -0.0153 -

right. Column 1 representsthe most basic spec- Software/computers/IT - -

(0.0143)
-0.0175 -
ification. Column 2 adds a linear time trend as - -
(0.0114)
-
Nonprofit
well as an indicator for post 9/11. The third -0.3342
(0.0112)
- - 0.0110
column adds industrydummies. The fourthcol- Banking
(0.0134)
umn includes company fixed effects. In general, Airlines and avionics - - 0.0220 -
(0.0106)
the coefficients are not particularlysensitive to Consumerservices - - -0.0350 -

the choice of specification;where the estimates (0.0187)

Engineering - - 0.0068 -

change substantially,I make note of it. Other- Unknown/other - -

(0.0120)
0.0091 -
wise, I simply describe the pattern of results (0.0115)
Observations 74,645 74,645 74,645 74,645
without specific reference to a particular R-squared 0.03 0.03 0.06 0.19
column. Company fixed effects No No No Yes

Controlling for other factors, the payment
rate is negatively correlated with the price of
bagels. Over the sample period, the price of
bagels rose 40 cents. The coefficients imply that
this price increaseis associatedwith a decline in
the payment rate of one to three percentage
points. This decline in payment is statistically
significant, but small in magnitude relative to
the price increases themselves (even the largest
coefficients imply that less than 8 percentof the
Notes: The dependentvariablein all regressionsis the payment
ratedefinedas paymentreceiveddividedby expectedpaymentif
paidthe postedprices.Forthe definitionof variables,see text or
notesto Table1. All regressionsareweightedby thetotalnumber
of productsdeliveredto eachcompany.Log (sizeof firstdelivery)
andindustrystandarderrorsareclusteredby company.All other
variablesareclusteredby data.Variables"Tuesday" and"Winter"
areomittedin all columns.The secondcolumndoes not include
the industryvariables.The finalcolumnincludescompanyfixed
effects,whicheliminatesall the variationin the size of the first
delivery and the industry.
VOL.96 NO. 2 EXPOSINGCHEATINGAND CORRUPTION
increase in the posted price is offset by reducing
payment rates). The estimate is robust to the
inclusion of a linear time trend, so this finding
does not appearto simply reflect a general de-
cline in payment rates over time, which might
otherwise explain this result, since in the data
prices rise over time. The decline in the pay-
ment rate appearsto be a permanent,ratherthan
temporary,response to the price increase. If an
indicatorfor the weeks or months afterthe price
change is added to the specification,it is never
statistically distinguishablefrom zero.
The greaterthe fraction of donuts and bagels
that are uneaten, the higher is the averagepay-
ment rate. This implies that the marginal cus-
tomer has a lower payment rate than the
inframarginalcustomer.
The greaterthe share of donuts in a delivery,
the lower is the payment rate. Because the
money for both productsis collected in one lock
box, the paymentratesfor bagels and donutsare
not separately observed. This coefficient im-
plies, however, that at the margin the payment
rate is roughly two to four percentage points
lower for donuts than bagels. One explanation
for this is that the set of people who purchase
donuts are more inclined toward larcenous ac-
tivity. Alternatively, it may be that customers
perceive the price of donuts as less fair than the
price of bagels. On a recent visit to Dunkin
Donuts, a bagel with cream cheese sold for
$1.79 versus $0.69 for a donut. Thus, relative to
this outside option, bagels (priced at 60 cents to
one dollar over the sample) appearcheap com-
pared to the donuts (which are offered for 50
cents).
The data available do not directly include the
numberof workersin the office. The best avail-
able proxy is the numberof bagels and donuts
included in the initial delivery, since the deliv-
ery company has relatively little informationon
which to base the optimal delivery size, other
than the number of potential customers. Based
on these estimates, there is a relatively weak
negative relationship between office size and
the payment rate. The direction of the effect is
consistent with theory regarding the free-rider
problem increasing with the size of the group.
The small magnitude of the effect of office
size, however, suggests that free-rider prob-
lems are not central to the payment decision
in this context.
There is no evidence that weather affects the
293
payment rate. The results suggest that payment
rates arehigheron Fridaysand lower before and
after major holidays (no such pattern appears
for minor holidays), perhaps consistent with
subtle psychological and emotional factors in-
fluencing the consumer's perception of the
transaction.The most strikingindicationof this
phenomenonis the increase in paymentrate that
immediately follows the 9/11 terroristattacks
and persists throughthe end of the sample three
years later.The dummyvariablefor 9/11 ranges
from 1 percent to 3 percent, depending on the
specification, and is statistically significant in
all columns.8Viewed relative to a nonpayment
rate of roughly 13 percent before the attack, a
persistent 1 percent to 2 percent increase in
payments is substantial.
The coefficients on the industrydummies in
column 3 reveal systematicdifferencesin pay-
ment ratesacrossindustries.The lowest payment
ratesareobservedin thetelecommunications, con-
sumerservices,andnonprofitsectors.Airlinesand
avionicsand governmentexhibitthe highestpay-
ment rates.
III. Conclusion
There are few applicationsof economic anal-
ysis superficially more trivial than the experi-
ences of a single companydeliveringbagels and
donuts. Nonetheless, I would argue that a thor-
ough analysis of this simple case study sheds
light on importanteconomic issues. From the
perspectiveof understandingwhite-collarcrime,
this analysis provides a rare glimpse into the
factors influencing such behavior, albeit in one
specific and not particularlyrepresentativecon-
text. The lessons regardingthe possible role of
nonpecuniarycosts of "doing the wrong thing"
and the role of perceived fairness in market
transactions are perhaps more generalizable.
The results obtained appearto be more consis-
tent with a model in which the willingness to
pay for bagels and donuts on the honor system
is drivenmore by issues of right and wrong and
fairness than by more standardeconomic con-
cepts such as narrowly defined self-interest or
free-riderproblems.
8 Perusal of the raw data on payment rates shows no
positive tendency in advance of the terroristattacks and a
sharpjump in the weeks immediately after 9/11.
294 AEA PAPERSAND PROCEEDINGS MAY2006

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Do LaboratoryExperiments Tell Us about
the Real World?"UnpublishedPaper, 2005.
Rabin, Matthew. "IncorporatingFairness into
GameTheoryandEconomics."AmericanEco-
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