Conformism, peer pressure and adverse selection

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Abstract:

To examine the effects of peer pressure in adverse selection problem, we define a peer pressure function that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent who has conformity preference produces less outputs than the first-best level, while the inefficient agent produces more than the second-best level of standard adverse selection output when the agents feel peer pressure among themselves. Although the production gap between the utility functions under peer pressure narrows, the gap of the ex post information rent goes wider as the information rent of efficient agents increases. Our theoretical results are consistent with some empirical/experimental findings.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701392877

Affiliations: Graduate School of International Studies, Pusan National University, Geumjeongu, Pusan 609-735, Republic of Korea

Publication date: December 1, 2009

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