We provide an explanation for peer pressure in teams based on inequity aversion. Analyzing a two-period model with two agents, we …nd that the e¤ect of inequity aversion strongly depends on the information structure. When contributions are unobservable, agents act as if they were purely sel…sh. However, when contributions are made transparent at an interim stage, agents exert higher e¤orts in the …rst period and adjust their e¤orts according to the interim information in the second period. This form of peer pressure reduces free-riding and thus, more e¢ cient outcomes are attained. The results are con…rmed in a real e¤ort experiment.

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This paper analyzes whether effort provision in entrepreneurial teams depends on the size of the team, assuming that size determines the strength of freeriding and peer pressure effects in entrepreneurial teams. We provide a theoretical model and empirical analyses to explain the joint effect of free-riding and peer pressure on effort in start-up teams. We begin with an economic model by Kandel and Lazear in J Polit Econ 100(4):801-817, (1992) and enrich it using insights from entrepreneurship research. Based on our model, we first hypothesize that with increasing team size in entrepreneurial teams, the efforts of the individual team founders should follow an inverted U-shaped pattern. Second, we argue that the peer pressure effect is stronger if team members have stronger social ties, and thus we expect the effort-maximizing team size to be larger in teams with stronger social ties. Using a data set from 214 German start-up teams, we find that our hypotheses are supported by the data.

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