Other-Regarding Preferences with Peer Workers in Labor Markets: An Experimental Investigation.

A peer worker is introduced in a controlled labor market experiment characterized by unobservable effort and incomplete contracts. Workers make decisions independently and without knowledge of each others’ actions in a modified gift exchange experiment. Introducing a peer worker into an ongoing market has a negative and significant effect on effort provided in contrast to prior experimental studies of peer effects which find positive effects with observable effort. This decrease in effort is not driven by other-regarding equity concerns for the manager’s payoffs.