Contracting in Peer Networks

We consider multiagent multifirm contracting when agents benchmark their wages to those of peers, using weights that vary within and across firms. When a single principal commits public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing load positively on peer output, asymmetries in effects can be exploited enhance profits. With multiple principals, “rat race” emerges: are more productive, with effort exceed the first best, but higher reduce profits undermine Wage transparency disclosure requirements exacerbate these effects. This article is protected by copyright. All rights reserved