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

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  • Burkhard Hehenkamp
  • Oddvar Kaarboe

Abstract

We study optimal incentive contracts offered to teams where team members feel a social pressure to exert similar effort levels. The team consists of two groups of agents differing in their productivity. We characterize first best and the equilibrium under agency. Regarding economic incentives, the principal has to adjust the incentives away from the first-best incentives that would arise in the absence of peer pressure. In equilibrium less productive agents exert less effort and all agents experience peer pressure.

Suggested Citation

  • 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.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200603)62:1_124:wsttrw_2.0.tx_2-_
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    References listed on IDEAS

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    1. Encinosa III, William E. & Gaynor, Martin & Rebitzer, James B., 2007. "The sociology of groups and the economics of incentives: Theory and evidence on compensation systems," Journal of Economic Behavior & Organization, Elsevier, vol. 62(2), pages 187-214, February.
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    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    5. Kohei Daido, 2006. "Peer Pressure and Incentives," Bulletin of Economic Research, Wiley Blackwell, vol. 58(1), pages 51-60, January.
    6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    7. 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.
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    Cited by:

    1. Kangsik Choi & Jae-Joon Han & Minhwan Lee, 2018. "Peer Pressure with Inequity Aversion," Korean Economic Review, Korean Economic Association, vol. 34, pages 131-155.

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    More about this item

    Keywords

    teams; incentives; heterogeneity; peer pressure;
    All these keywords.

    JEL classification:

    • 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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