Conformity pressure and compensation contracts

51 Pages Posted: 20 May 2022

See all articles by Taichi Kimura

Taichi Kimura

Keio University - Graduate School of Business Administration

Yutaro Murakami

Keio University

Date Written: March 20, 2022

Abstract

Conforming behaviors due to conformity pressure have been widely observed in economic and psychological experiments. This study examines how conformity pressure affects an agent's incentives and the principal's net payoff using behavioral contract theory. Specifically, we identify the conditions under which conformity pressure can lead to positive or negative outcomes, focusing on agent heterogeneity. Our main results are as follows. First, when the conformity preference of agents is homogeneous, if the principal can set a performance measure congruent with an agent's productivity, conformity pressure will always be detrimental to the principal. By contrast, if it is difficult for the principal to set such a congruent performance measure, the conformity pressure would improve inter-agent effort allocation, depending on the agent's risk aversion. Second, when the conformity preference of agents is heterogeneous, the only agent with a low effort level feeling conformity pressure may be desirable to the principal, even if the principal can set a congruent performance measure.

Keywords: Conformity pressure, Compensation contracts, Heterogeneity, Congruent performance measures, Incongruent performance measures

JEL Classification: D86, D90, M41

Suggested Citation

Kimura, Taichi and Murakami, Yutaro, Conformity pressure and compensation contracts (March 20, 2022). Available at SSRN: https://ssrn.com/abstract=4113994 or http://dx.doi.org/10.2139/ssrn.4113994

Taichi Kimura (Contact Author)

Keio University - Graduate School of Business Administration ( email )

4-1-1 Hiyoshi, Kohoku-ku
Yokohama, 223-8526
Japan

Yutaro Murakami

Keio University ( email )

Japan

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