Transparency, Inequity Aversion, and the Dynamics of Peer Pressure in Teams: Theory and Evidence

Abstract

We provide an explanation for peer pressure in teams based on inequity aversion. Analyzing a two-period model with two agents, we …nd that the e¤ect of inequity aversion strongly depends on the information structure. When contributions are unobservable, agents act as if they were purely sel…sh. However, when contributions are made transparent at an interim stage, agents exert higher e¤orts in the …rst period and adjust their e¤orts according to the interim information in the second period. This form of peer pressure reduces free-riding and thus, more e¢ cient outcomes are attained. The results are con…rmed in a real e¤ort experiment.

The Internal and External Governance of Cooperatives: Membership and Consistency of Values

“…This has been clearly addressed by experimental literature on the supply of public goods (Fehr and Schmidt, 1999;Fehr et al, 2002). In teamwork studies, peer pressure has been described as a coordination mechanism that reduces shirking and free-riding, therefore increasing the trustworthiness of the members of the cooperating team (Mohnen et al, 2008;Mas and Moretti, 2009). Experimental studies have also emphasised the role of intrinsic motivations, since intrinsically motivated actors are less likely to free-ride on the delivery of public goods as a form of collective, and compatible firm objectives (Meidinger et al, 2000;Degli Antoni, 2009;Hayashi et al, 2011).…”

Inequality Aversion and Externalities

“…Grund and Sliwka (2005) consider a tournament model with inequality-averse contestants. A dynamic team production model with inequality-averse players is dealt with in Mohnen et al (2008).…”

“…Fehr and Schmidt (1999) as well as Mohnen et al (2008) consider dynamic models in which players impose positive externalities on each other. Fehr and Schmidt (1999) find that proposers in the ultimatum game offer a higher amount of money to receivers, whereas Mohnen et al (2008) show that team members increase their effort above the level that a selfish person would choose. Both observations are reminiscent of our finding that players internalize externalities they impose on others because of indirect effects of inequality aversion.…”

Joint Contract under Inequity Aversion

“…Literature [15,16] focused on the case of a single agent, while [17,18,19] and [20] examined that of multiple agents. Tournament amongst agents with inequity aversion is considered in [21] and [22], while [23,24] and [25] probed the influence of inequity aversion on team incentives. Furthermore, [26,27] and [28] studied peer pressure, a special form of social preference similar to inequity aversion.…”