Contracts with Social Multipliers

35 Pages Posted: 20 Dec 2005

See all articles by Mary A. Burke

Mary A. Burke

Federal Reserve Bank of Boston

Kislaya Prasad

Florida State University - Department of Economics

Date Written: December 2005

Abstract

We develop a model of contracting in which individual effort choices are subject to social pressure to conform to the average effort level of others in the same risk-sharing group. As in related models of social interactions, a change in exogenous variables or contract terms generates a social multiplier. In this environment, small differences in fundamentals such as skill or effort cost can lead to large differences in group productivity. We characterize the optimal contract for this environment and describe the properties of equilibria, properties that agree with stylized facts on effort compression in revenue-sharing settings. The model also implies potential sorting into groups on the basis of idiosyncratic effort costs. We estimate a significant social multiplier on physician productivity, using data on medical partnerships.

Keywords: agency theory, peer pressure, social interactions, contracts, social multipliers

JEL Classification: D2, D8, C7

Suggested Citation

Burke, Mary A. and Prasad, Kislaya, Contracts with Social Multipliers (December 2005). FRB Boston Working Paper No. 05-17, Available at SSRN: https://ssrn.com/abstract=871212 or http://dx.doi.org/10.2139/ssrn.871212

Mary A. Burke (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3066 (Phone)

Kislaya Prasad

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

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