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Monopolistic Group Design with Peer Effects

  • Simon Board

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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File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-276-1.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-276.

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Length: 36 pages
Date of creation: 14 Jan 2007
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-276
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Helen F. Ladd, 2002. "School Vouchers: A Critical View," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 3-24, Fall.
  2. 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.
  3. Bruce Sacerdote, 2001. "Peer Effects With Random Assignment: Results For Dartmouth Roommates," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 681-704, May.
  4. Mas, Alexandre & Moretti, Enrico, 2006. "Peers at Work," CEPR Discussion Papers 5870, C.E.P.R. Discussion Papers.
  5. Richard Arnott & John Rowse, 1982. "Peer Group Effects and Educational Attainment," Working Papers 497, Queen's University, Department of Economics.
  6. Nicola Persico, 1997. "Information Acquisition in Auctions," UCLA Economics Working Papers 762, UCLA Department of Economics.
  7. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  8. Jacob M. Markman & Eric A. Hanushek & John F. Kain & Steven G. Rivkin, 2003. "Does peer ability affect student achievement?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(5), pages 527-544.
  9. 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.
  10. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  11. Edward P. Lazear, 2001. "Educational Production," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 777-803, August.
  12. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-92, September.
  13. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  14. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  15. Armin Falk & Andrea Ichino, 2004. "Clean Evidence on Peer Effects," Levine's Bibliography 666156000000000439, UCLA Department of Economics.
  16. 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.
  17. 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.
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