Peer Effects and Incentives
Feb 4th, 2016
In a multi-agent setting, individuals often compare own performance with that of their peers. These comparisons influence agents' incentives and lead to a noncooperative game, even if the agents have to complete independent tasks. I show that depending on the interplay of the peer effects, agents' efforts are either strategic complements or strategic substitutes, but the Informativeness Principle always applies. I solve for the optimal monetary incentives that complement the peer effects. In case of limited liability, the principal may prefer to implement inefficiently large efforts although agents earn positive rents that increase in the respective agent's effort level.