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Confidence-Enhanced Economic Growth

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Author Info
Angus Chu (University of Michigan)

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Abstract

This paper investigates one causal link between entrepreneurial overconfidence and economic growth in the US. Evidence from the social psychology literature suggests that this biased perception can lead to more successful outcomes for individuals. This paper examines the impacts of entrepreneurial overconfidence on the aggregate economy using an R&D-driven endogenous growth model. From this perspective, overconfidence is equivalent to a subsidy to R&D such that overconfident entrepreneurs are more likely to invest, and this increased R&D intensity is the driving force behind faster economic growth. In terms of social welfare, a small degree of overconfidence moves the market equilibrium level of R&D closer to the social optimum; however, a large degree of overconfidence may move the economy beyond the optimal level. Therefore, the welfare impact is ambiguous.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1495-1495
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Handle: RePEc:bep:mactop:v:7:y:2007:i:1:p:1495-1495

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Related research
Keywords: endogenous growth overconfidence R&D

Find related papers by JEL classification:
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

References listed on IDEAS
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  1. Glaeser, Edward L & Hedi D. Kallal & Jose A. Scheinkman & Andrei Shleifer, 1992. "Growth in Cities," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1126-52, December. [Downloadable!] (restricted)
    Other versions:
    • Edward L. Glaeser & Hedi D. Kallal & Jose A. Scheinkman & Andrei Shleifer, 1991. "Growth in Cities," NBER Working Papers 3787, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Oded Galor & Stelios Michalopoulos, 2006. "Darwinian Evolution of Entrepreneurial Spirit and the Process of Development," Working Papers 2006-12, Brown University, Department of Economics. [Downloadable!]
  3. Guido Tabellini, 2005. "Culture and Institutions: Economic Development in the Regions of Europe," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  4. Manove, M., 1995. "Entrepreneurs, Optimism, and the Competitive Edge," UFAE and IAE Working Papers 296.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Colin Camerer & Dan Lovallo, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March. [Downloadable!] (restricted)
  6. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May. [Downloadable!] (restricted)
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  7. Nickell, Stephen & Nicolitsas, Daphne & Dryden, Neil, 1997. "What makes firms perform well?," European Economic Review, Elsevier, vol. 41(3-5), pages 783-796, April. [Downloadable!] (restricted)
    Other versions:
  8. Luís Santos-Pinto & Joel Sobel, 2005. "A Model of Positive Self-Image in Subjective Assessments," American Economic Review, American Economic Association, vol. 95(5), pages 1386-1402, December. [Downloadable!]
  9. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December. [Downloadable!] (restricted)
  10. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2006. "Does Culture Affect Economic Outcomes?," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 23-48, Spring.
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  11. Juan Dubra, 2004. "Optimism and Overconfidence in Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 198-218, January. [Downloadable!] (restricted)
  12. Jones, Charles I & Williams, John C, 2000. " Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March. [Downloadable!] (restricted)
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  13. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March. [Downloadable!] (restricted)
    Other versions:
  15. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
    Other versions:
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