Misspecified beliefs and the evolution of peer pressure

Abstract

We study the emergence of conformity preferences in an environment in which agents choose effort under heterogeneous, possibly misspecified returns, and social interactions do not directly affect material payoffs. Some agents choose effort by trading off performance and conformity to expected peer behavior. We characterize subjective best responses. For any given beliefs, an optimal and unique level of peer pressure exists and is evolutionarily stable within groups of agents sharing the same misspecification. Such a level is zero for correctly specified agents and may be positive for misspecified ones. When the efficient level of peer pressure is interior, misspecified agents choose effort equal to their true return, resulting in an equilibrium behavior that is both self-confirming and Nash, allowing the persistence of misspecifications. Peer pressure need not generate long-run allocative distortions, but it creates a perceived value of social information. In equilibrium, this value depends only on misspecification, generating scope for informational rents.