Peer pressure and moral hazard : evidence from retail banking investment advisors

Abstract

It is generally believed that pressure from peers induces employees to improve their efficiency and performance, but there is little literature analysing whether employees' improved performance is detrimental to the interests of others, and the issue of moral hazard behind peer pressure has yet to be studied. Based on data from a sample of accounts at a large commercial bank in China, this paper measures peer pressure in terms of the performance of financial managers relative to their colleagues, in terms of sales of financial products, and moral hazard in terms of sales of poor-quality financial products ("high-risk-low-return" products). This empirical study finds that peer pressure can improve the performance of financial managers, but it can also exacerbate moral hazard, resulting in a significant increase in sales of poor-quality financial products, especially among poor-performing financial managers. In addition, customer complaints can be effective in reducing moral hazard, and the number of competitors provides the threshold condition by which peer pressure can trigger moral hazard. Based on correspondence between financial managers and clients, we find that moral hazard occurs mainly between female financial managers and male clients, and between financial managers who lack work experience and clients who lack investment experience.