 Peer Pressure and IncentivesNo 03-13, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics Abstract: We analyze the effect of peer pressure on the incentives offered by a principal, supposing that there are two agents who make costly efforts to produce a single output. The agents are rewarded by the principal, contingent on the realized output. In addition to this pecuniary payoff, we consider the psychological payoff brought by peer pressure. That is, each agent feels peer pressure if his effort level deviates from the average level of effort exerted by others. We consider two significant features of peer pressure. First, we consider that the agents are heterogeneous with respect to their productivities. Second, we consider that each agent feels pressure not only when his effort level is below the average level, but also when it is above that level. Then, peer pressure affects the incentives. More precisely, the principal offers high-powered incentives to the low-productivity agent and low-powered incentives to the high-productivity agent. As a result, the principal can alleviate peer pressure by offering incentives based on each agent fs productivity. Keywords: Heterogeneous Agents; Incentives; Peer Pressure; Limited Liability. Risk-Sharing (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:0313 Access Statistics for this paper More papers in Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics Contact information at EDIRC. |
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