Contracting in Peer Networks

70 Pages Posted: 18 Feb 2021 Last revised: 11 Nov 2022

See all articles by Peter M. DeMarzo

Peter M. DeMarzo

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 3 versions of this paper

Date Written: January 16, 2021

Abstract

We consider multi-agent multi-firm contracting when agents benchmark their wages to those of 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.

Keywords: contracting, peer performance, keeping up with Joneses, peer, relative wage, network, moral hazard

JEL Classification: d62, d85,d86, g41, j41, m52, g30

Suggested Citation

DeMarzo, Peter M. and Kaniel, Ron, Contracting in Peer Networks (January 16, 2021). Available at SSRN: https://ssrn.com/abstract=3767603 or http://dx.doi.org/10.2139/ssrn.3767603

Peter M. DeMarzo

Stanford Graduate School of Business ( email )

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HOME PAGE: http://www.stanford.edu/people/pdemarzo

National Bureau of Economic Research (NBER)

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Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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