Contracting in Peer Networks

71 Pages Posted: 14 Jul 2021

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: May 2021

Abstract

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

Suggested Citation

DeMarzo, Peter M. and Kaniel, Ron, Contracting in Peer Networks (May 2021). CEPR Discussion Paper No. DP16177, Available at SSRN: https://ssrn.com/abstract=3886617

Peter M. DeMarzo (Contact Author)

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Ron Kaniel

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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