Rank Expectations, Feedback and Social Hierarchies

We examine whether private feedback about relative performance can mitigate moral hazard in competitive settings, by modifying agents’ self-esteem. In our experimental setting people work harder and expect to rank better when told they may learn their ranking, relative to cases when feedback will not be provided. Individuals who ranked better than expected decrease output but expect a better rank in the future, while those who ranked worse than expected increase output but lower their future rank expectations. Feedback helps create a ratcheting effect in productivity, mainly due to the fight for dominance at the top of the rank hierarchy. We thank Pierpaolo Battigalli, Shimon Kogan, Jonathan Parker, Paola Sapienza and participants at the 2008 ESA European Meeting, the 2008 La Pietra-Mondragone Theory Workshop, the 2008 International ESA Conference, and the 2008 NBER Behavioral Finance Meeting for valuable comments and discussion. Department of Finance, Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208-2001, [email protected]. Kuhnen gratefully acknowledges financial support from the Zell Center for Risk Research. Department of Economics, Bocconi University, [email protected], Via Roentgen 1, 20136 Milano, Italy