Optimal Capacity and Price Designs Under Ex Ante and Ex Post Theft.

This article addresses the challenge of internal theft in retail firms by modeling it as a principal-agent problem involving moral hazard, where a firm (principal) contracts a retail manager (agent) who may steal either before demand realization (ex ante stealing) or after sales revenue is generated (ex post stealing). The study derives an optimal commission scheme with a threshold structure that deters both types of stealing by providing the agent with incentives aligned to truthful reporting and full capacity deployment. Key findings reveal that optimal pricing and capacity decisions respond nonmonotonically to the severity of ex post stealing, while adjustments to ex ante stealing severity are monotonic beyond a threshold; notably, simply increasing retail prices to offset theft losses is not always optimal and can exacerbate agency problems. The results hold under various demand uncertainty distributions and extend to settings with convex stealing costs, emphasizing the importance of jointly optimizing commission contracts and operational decisions to mitigate internal theft impacts effectively.