Rank expectations, feedback and social hierarchies

We develop and test experimentally a theoretical model of the role of self-esteem, generated by private feedback regarding relative performance, on the behavior of agents working on an effort provision task for a flat wage. Agents work harder and expect to rank better when they are told they may learn their ranking, relative to cases when they are told feedback will not be provided. Individuals who learn that they have ranked better than expected decrease their output but expect an even better rank in the future, while those who were told they ranked worse than expected increase their output and at the same time lower their rank expectations going forward. These effects are stronger in earlier rounds of the task, while subjects learn how they compare to their peers. This rank hierarchy is established early on, and remains relatively stable afterwards. Private relative rank information helps create a ratcheting effect in the group's average output, which is mainly due to the fight for dominance at the top of the hierarchy. Hence, in environments where monetary incentives are weak, moral hazard may be mitigated by providing feedback to agents regarding their relative performance, and by optimally choosing the reference peer group.