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Contracting in Peer Networks

Author

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  • Kaniel, Ron
  • DeMarzo, Peter

Abstract

We consider multi-agent multi-firm contracting when agents benchmark their wages to their peers’, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals a “rat race†emerges: agents are more productive, with effort that can exceed the first-best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.

Suggested Citation

  • Kaniel, Ron & DeMarzo, Peter, 2021. "Contracting in Peer Networks," CEPR Discussion Papers 16177, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:16177
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    Cited by:

    1. is not listed on IDEAS
    2. Panagiotis E. Souganidis & Thaleia Zariphopoulou, 2024. "Mean field games with unbounded controlled common noise in portfolio management with relative performance criteria," Mathematics and Financial Economics, Springer, volume 18, number 10, June.
    3. Wei, Xiaoqin (Alex), 2025. "Managerial overconfidence and pay-for-luck," International Review of Financial Analysis, Elsevier, vol. 107(C).
    4. Wang, Liyuan & Ding, Chuan & Wang, Zhiyu & Zeng, Siyuan, 2025. "Fixed versus dynamic investment: Optimal contracting with competitive entrepreneurs," Finance Research Letters, Elsevier, vol. 82(C).
    5. Sun, Yang & Zhao, Wei, 2024. "Relative performance evaluation in spillover networks," Games and Economic Behavior, Elsevier, vol. 145(C), pages 285-311.

    More about this item

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G4 - Financial Economics - - Behavioral Finance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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