In a range of settings, private firms manage peer effects by sorting agents into different groups, be they schools, neighbourhoods or teams. This paper considers such a firm, which controls group entry by setting a series of anonymous prices. We show that private provision systematically leads to two distortions relative to the efficient solution: first, agents are segregated too finely; second, too many agents are excluded from all groups. We demonstrate that these distortions are a consequence of anonymous pricing and do not depend upon the nature of the peer effects. This general approach also allows us to assess the way the `returns to scale' of peer technology and the cost of group formation affect the optimal group structure.
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
tecipa-276.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Alexandre Mas & Enrico Moretti, 2006.
"Peers at Work,"
IZA Discussion Papers
2292, Institute for the Study of Labor (IZA).
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Other versions:
Alexandre Mas & Enrico Moretti, 2006.
"Peers at Work,"
NBER Working Papers
12508, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)