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Contracts with social multipliers

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  • Mary A. Burke
  • Kislaya Prasad

Abstract

We develop a model of contracting in which individual effort choices are subject to social pressure to conform to the average effort level of others in the same risk-sharing group. As in related models of social interactions, a change in exogenous variables or contract terms generates a social multiplier. In this environment, small differences in fundamentals such as skill or effort cost can lead to large differences in group productivity. We characterize the optimal contract for this environment and describe the properties of equilibria, properties that agree with stylized facts on effort compression in revenue-sharing settings. The model also implies potential sorting into groups on the basis of idiosyncratic effort costs. We estimate a significant social multiplier on physician productivity, using data on medical partnerships.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 05-17.

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Date of creation: 2005
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Handle: RePEc:fip:fedbwp:05-17

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Keywords: Contracts ; Social choice;

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  1. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
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  8. Jayasri Dutta, Kislaya Prasad, 2001. "Stable Risk Sharing," Computing in Economics and Finance 2001 244, Society for Computational Economics.
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  12. Edward L. Glaeser & Jose A. Scheinkman, 1999. "Measuring Social Interactions," Harvard Institute of Economic Research Working Papers 1878, Harvard - Institute of Economic Research.
  13. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
  14. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  15. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  16. Joel M. GUTTMAN, 2001. "Families, Markets and Self-Enforcing Reciprocity Norms," Annales d'Economie et de Statistique, ENSAE, issue 63-64, pages 89-110.
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