Conformism, peer pressure and adverse selection

Kangsik Choi

Applied Economics, 2009, vol. 41, issue 26, 3403-3409

Abstract: To examine the effects of peer pressure in adverse selection problem, we define a peer pressure function that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent who has conformity preference produces less outputs than the first-best level, while the inefficient agent produces more than the second-best level of standard adverse selection output when the agents feel peer pressure among themselves. Although the production gap between the utility functions under peer pressure narrows, the gap of the ex post information rent goes wider as the information rent of efficient agents increases. Our theoretical results are consistent with some empirical/experimental findings.

Date: 2009
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DOI: 10.1080/00036840701392877

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