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Title Peer Pressure with Inequity Aversion
Author Kangsik Choi (Pusan National University), Jae-Joon Han (Inha University) and Minhwan Lee (Inha University)
Volume 34 Number 2
Pages 131-155 
Keywords First Peer Pressure, Inequity Aversion, Adverse Selection, Total Output, Trade-off
Abstract To examine the effects of peer pressure on outputs under symmetric and asymmetric
information, we define a peer pressure function representing psychological costs and
incorporate it into the agents utility function. Under symmetric information, an efficient
agent who is averse to inequity (i.e., suffering from being ahead) produces less than he does
without peer pressure whereas an inefficient agent suffering from being behind produces
more such that the output gap between the two types of agents is lessened. Moreover,
overproduction in total output will occur if the inefficient agents disadvantage inequity
aversion is greater than that of the efficient agents. However, as the information structure
becomes asymmetric, the overproduction disappears because the information rent paid to the
efficient agent becomes too burdensome so that it countervails the active peer pressure effect.
These results are consistent with previous findings from empirical and experimental studies.
File KER-20180701-34-2-02.pdf
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