Peer Pressure and Moral Hazard in Teams: Experimental Evidence

Team incentives have been found to be particularly effective both in the lab and in the field despite the moral hazard in teams problem identified by Holmstrom (1982). In a newly developed virtual workplace, we show that, in line with Holmstrom, moral hazard in teams is indeed pervasive. Subsequently, we find strong evidence for the conjecture of Kandel and Lazear (1992) that peer pressure may resolve the moral hazard in teams problem. Organizations equipped with a very weak form of peer monitoring (anonymous and without physical proximity, verbal threats or face-to-face interactions) perform as well as those using individual incentives.