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Peer Pressure and Incentives

Author

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  • Kohei Daido

    (Graduate School of Economics, Osaka University)

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.

Suggested Citation

  • Kohei Daido, 2003. "Peer Pressure and Incentives," Discussion Papers in Economics and Business 03-13, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0313
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    References listed on IDEAS

    as
    1. Hideshi Itoh, 2004. "Moral Hazard and Other‐Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45, March.
    2. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    3. Barron, John M & Gjerde, Kathy Paulson, 1997. "Peer Pressure in an Agency Relationship," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 234-254, April.
    4. Kohei Daido, 2004. "Risk-averse agents with peer pressure," Applied Economics Letters, Taylor & Francis Journals, vol. 11(6), pages 383-386.
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    Cited by:

    1. M.G. Lloyd, 2008. "Towards a ‘Pooled Sovereignty‘ in Community Planning in Scotland?," Local Economy, London South Bank University, vol. 23(1), pages 58-68, February.
    2. Cato, Susumu & Ebina, Takeshi, 2014. "Inequality aversion in long-term contracts," MPRA Paper 59893, University Library of Munich, Germany.
    3. Kohei Daido, 2006. "Incentive Effects of Peer Pressure in Organizations," Economics Bulletin, AccessEcon, vol. 10(14), pages 1-10.
    4. Burkhard Hehenkamp & Oddvar Kaarboe, 2006. "When Should the Talented Receive Weaker Incentives? Peer Pressure in Teams," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(1), pages 124-148, March.
    5. repec:ebl:ecbull:v:10:y:2006:i:14:p:1-10 is not listed on IDEAS
    6. Kohei Daido, 2004. "Risk-averse agents with peer pressure," Applied Economics Letters, Taylor & Francis Journals, vol. 11(6), pages 383-386.
    7. Kohei Daido, 2009. "Incentives, Identity, and Organizational Forms," Discussion Paper Series 47, School of Economics, Kwansei Gakuin University, revised Jul 2009.

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    More about this item

    Keywords

    Heterogeneous Agents; Incentives; Peer Pressure; Limited Liability. Risk-Sharing;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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