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Monopolistic group design with peer effects

  • Board, Simon

    ()

    (Department of Economics, University of California Los Angeles)

In a range of settings, private firms manage peer effects by sorting agents into different groups, be they schools, communities, or product categories. 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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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 4 (2009)
Issue (Month): 1 (March)
Pages:

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Handle: RePEc:the:publsh:413
Contact details of provider: Web page: http://econtheory.org

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  1. Damiano, Ettore & Li, Hao, 2005. "Competing Matchmaking," Microeconomics.ca working papers damiano-05-01-25-10-08-07, Vancouver School of Economics, revised 18 Oct 2005.
  2. Alexandre Mas & Enrico Moretti, 2009. "Peers at Work," American Economic Review, American Economic Association, vol. 99(1), pages 112-45, March.
  3. William C. Strange & Robert W. Helsley, 2000. "Social Interactions and the Institutions of Local Government," American Economic Review, American Economic Association, vol. 90(5), pages 1477-1490, December.
  4. Richard Arnott & John Rowse, 1982. "Peer Group Effects and Educational Attainment," Working Papers 497, Queen's University, Department of Economics.
  5. Armin Falk & Andrea Ichino, 2006. "Clean Evidence on Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 39-58, January.
  6. Helen F. Ladd, 2002. "School Vouchers: A Critical View," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 3-24, Fall.
  7. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-92, September.
  8. Edward P. Lazear, 1999. "Educational Production," NBER Working Papers 7349, National Bureau of Economic Research, Inc.
  9. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  10. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  11. Bruce Sacerdote, 2000. "Peer Effects with Random Assignment: Results for Dartmouth Roommates," NBER Working Papers 7469, National Bureau of Economic Research, Inc.
  12. Henderson, Vernon & Mieszkowski, Peter & Sauvageau, Yvon, 1978. "Peer group effects and educational production functions," Journal of Public Economics, Elsevier, vol. 10(1), pages 97-106, August.
  13. 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.
  14. Eric A. Hanushek & John F. Kain & Jacob M. Markman & Steven G. Rivkin, 2001. "Does Peer Ability Affect Student Achievement?," NBER Working Papers 8502, National Bureau of Economic Research, Inc.
  15. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  16. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  17. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
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