CeDEx 2018-12: A theory of esteem based peer pressure

Summary

More than thirty years ago, the famous economist John Harsanyi noted that "apart from economic payoffs, social status seems to be the most important incentive and motivating force of social behavior.". At least since then, economists have tried to incorporate the incentives arising from status into their formal models. However, little attention has been devoted to understanding if and how the characteristics of one's peers affect the incentives to engage in costly signaling.

In this Nottingham School of Economics working paper Fabrizio Adriani and Silvia Sonderegger do exactly this. The underlying idea is very simple. Belonging to a particular group (school, firm, fraternity, sport club, academic institution) conveys information about one's own characteristics (wealth, ability, social skills). This is because different groups typically carry different distributions of relevant attributes among their members. For instance, job market candidates from prestigious academic institutions are automatically accorded higher expected ability than candidates from second tier institutions. This opens the door to the possibility that identical individuals who happen to belong to different groups may face different pressure to engage in status-enhancing signaling. The model addresses the following questions: What is the effect of belonging to a "better" (smarter, richer, more pro-social) group on the incentive to engage in costly signaling? What is the effect of a more diverse group? What is the effect of segregation by ability (e.g. admissions policies to academic programmes)? The authors characterize the conditions under which the pressure to provide the costly signal increases or decreases in peer quality -- generating a "keeping up with the Joneses" or a "small fish in a big pond" effect. Finally, the authors study the implications of increasing (or decreasing) wealth inequality on the incentive to engage in conspicuous consumption.

CeDEx discussion paper 2018-12: A theory of esteem based peer pressure, by Fabrizio Adriani and Silvia Sonderegger.

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Now published in Games Economic Behavior (May 2019)

Authors

Fabrizio Adriani and Silvia Sonderegger

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