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Overconfidence and welfare in a differentiated duopoly

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  • Jean‐Baptiste Tondji

Abstract

We examine whether owners' decisions to delegate corporate responsibilities to overconfident managers improve welfare. We develop a dynamic model with product differentiation, where firms compete in cost‐reducing research and development (R&D) and output. Before firms compete, each owner makes a strategic decision whether to hire an overconfident manager. The results reveal that when R&D technology is less productive, owners hire overconfident managers who overinvest in cost‐reducing R&D. These strategic decisions improve welfare when spillovers are small and R&D productivity is low, or spillovers are large, or product differentiation is strong.

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  • Jean‐Baptiste Tondji, 2022. "Overconfidence and welfare in a differentiated duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 751-767, April.
    • Handle: RePEc:wly:mgtdec:v:43:y:2022:i:3:p:751-767
    DOI: 10.1002/mde.3416
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