We study the effects of peer pressure on the incentives of riskaverse agents. We define the peer pressure function and then assume that each agent feels peer pressure not only when his effort level is below the standard level, but also when it is above that level. We also suppose that agents are...

This paper studies the effects of peer pressure on incentives. We assume that, in addition to the material payoff, each agent's utility includes the psychological payoff from peer pressure generated by a comparison of effort costs. We show that the optimal incentive schemes depend mainly on the...