Contracting in Peer Networks /
DeMarzo, Peter M.
Contracting in Peer Networks / Peter M. DeMarzo, Ron Kaniel. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w28378 . - Working Paper Series (National Bureau of Economic Research) no. w28378. .
January 2021.
We consider multi-agent multi-firm contracting when agents benchmark their wages to a weighted average of their peers, where weights may vary within and across firms. Despite common shocks, compensation benchmarking can undo performance benchmarking, so that wages load positively rather than negatively on peer output. Although contracts appear inefficient, when a single principal commits to a public contract, the optimal contract hedges agents' relative wage risk without sacrificing efficiency. Moreover, the principal can exploit any asymmetries in peer effects to enhance profits. With multiple principals, or a principal that is unable to commit, a "rat race" emerges in which agents are more productive, but wages increase even more, reducing profits and undermining efficiency. Effort levels are too high rather than too low, and can exceed first best. Wage transparency and disclosure requirements exacerbate these effects.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Contracting in Peer Networks / Peter M. DeMarzo, Ron Kaniel. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w28378 . - Working Paper Series (National Bureau of Economic Research) no. w28378. .
January 2021.
We consider multi-agent multi-firm contracting when agents benchmark their wages to a weighted average of their peers, where weights may vary within and across firms. Despite common shocks, compensation benchmarking can undo performance benchmarking, so that wages load positively rather than negatively on peer output. Although contracts appear inefficient, when a single principal commits to a public contract, the optimal contract hedges agents' relative wage risk without sacrificing efficiency. Moreover, the principal can exploit any asymmetries in peer effects to enhance profits. With multiple principals, or a principal that is unable to commit, a "rat race" emerges in which agents are more productive, but wages increase even more, reducing profits and undermining efficiency. Effort levels are too high rather than too low, and can exceed first best. Wage transparency and disclosure requirements exacerbate these effects.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.