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CHO Hyun-Kuk

Peer Effect: Invisible Power that Boosts Productivity

CHO Hyun-Kuk

Jan. 29, 2010

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Peer effect refers to being influenced by the behavior and way of thinking of peers. For example, the preference for top school districts reflects a belief that students will study harder if they are with peers with better school records. Peer effect occurs when one tries to abide by a norm and follows a role model. Abiding by a norm occurs when a peer's actions is followed to avoid social penalty such as being ostracized. In following a role model, actions and behavior of an exemplary peer are adopted. For example a student may use the same reference book as an outstanding classmate.

In a company, peer effect can explain different levels of productivity. This process was described in a Journal of Labor Economics report in 2006,"Clean Evidence on Peer Effects." In the study, 24 high school students in Switzerland were assigned to stuff letters in envelopes. The testing was done in pairs and individually; 16 students were paired up while eight students worked alone in separate rooms. Those who worked alone stuffed an average of 190 envelopes in four hours. Those working in pairs stuffed an average of 221 envelopes, 16.3% more than the solo students. The 31-envelope difference indicates positive peer effect can lead to greater productivity.

To facilitate peer effect, three factors are needed: an optimal mix of workers who can collectively maximize peer effect; a work environment in which peers can observe each other; and encouragement, or evaluation and compensation.

In terms of peer combination, workers with different productivity levels, rather than those with similar productivity levels, should be put together. Such a workforce mixture enables employees with low productivity to study the work habits of colleagues with higher productivity. There is also peer pressure on each worker to raise individual productivity level. In Peers at Work published in the American Economic Review in 2009, Alexandre Mas and Enrico Moretti investigated how cashiers influenced each other in supermarkets. One of the seven cashiers at the store was replaced by someone with high productivity. The overall productivity of the other six cashiers subsequently increased.

The second factor for an ideal mix of personnel is to consider intimacy among peers. Enhancing the closeness of peers facilitates a higher sense of mutual responsibility and forms a mutual norm, thereby raising team performance. An organization can use team sports competition to enhance unity and enhance productivity. There are also studies that if one has a friend within the team then his/her productivity becomes similar to the friend. This is because a common norm exists among friends and they try to abide by that norm.

It is necessary to consider relationships among colleagues in order to prevent negative peer effect. If a substitute relationship exists, work can be completed even if an employee does not do his/her share. Thus, high level of productivity from one employee can lead to a decline in productivity of a co-worker. Let's compare two situations at a bank. In the first one, a customer stands in line to receive service at a specific bank window and in the second scenario a customer takes a number and waits for it to be called, not knowing which window she will eventually go to (the latter being a substitute relationship). The first scenario will more likely lead to an increase in productivity.

Meanwhile, if workers are in a complementary relationship (a task cannot be completed when an employee fails to perform) productivity enhancement by one worker can lead to higher team productivity.

An analysis of Major League baseball statistics reflects peer effects stemming from complementary and substitute relationships, as is described in "Interactions between Workers and the Technology of Production: Evidence from Professional Baseball" published in Review of Economics and Statistics in 2009. A player's batting significantly increases with the batting performance of other players on the same team, but decreases with the pitching quality of the pitcher of the same team.

The second condition is work environment in which observation among co-workers is possible. To foster a positive peer effect, one should be able to see how others work. It would allow employees to learn from each other, which in turn can induce a sound peer pressure. This was also the case in the supermarket case cited in Peers at Work, where a cashier who was far away from a highly capable cashier wasn't able to improve productivity due to an absence of a peer pressure.

The third condition is proper motivation. A system which one evaluates his/her co-worker spurs positive peer effect. When there is a mutual evaluation, there will be higher incentive to help one's co-worker, which will result in higher team productivity. To create greater positive peer effect, a company should take advantage of such evaluation and team compensation. Team compensation such as profit sharing will induce peer pressure and contribute to raise team performance.

Peer effect is an effective means to raise productivity without making huge monetary investment. An organization should attempt to maximize positive peer effect by addressing the three necessary conditions. A wrong mix will result in a negative peer effect, and encouraging competition among workers or emphasizing only performance just to raise peer effect will not be effective since it will lead to a decline in team work and productivity. Meanwhile, it is necessary to examine ways to prevent peer effect from declining due to the emergence of new work trends such as teleworking. It will be necessary to prepare complementary measures to induce peer effect in line with the spread of such a new work environment.

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