When the Talented Should Receive Weaker Incentives: Peer Pressure in Teams

Burkhard Hehenkamp and Oddvar Kaarboe ()

Discussion Papers in Economics from University of Dortmund, Department of Economics

Abstract: We study optimal incentive contracts in teams which consist of two groups of agents differing in their productivity and where team members feel a social pressure to exert similar effort. We show that it is first-best optimal to induce the more productive agent to exert higher effort. We then characterize the equilibrium under agency. It turns out that the principal always chooses to give the less productive agents the strongest incentives. Furthermore, we show that the principal is able to implement the unique first-best solution. In this solution less productive agents exert less effort, and all agents experience peer pressure.

Pages: 26 pages
Date: 2004-09
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