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The Effects of Peer Pressure and Risk Sharing on Incentives



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 heterogeneous in terms of their productive ability and the degree to which they respond to peer pressure. We show that a principal provides incentives that depend on the effects of peer pressure and risk-sharing.

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