Self-Confidence and Timing of Entry

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Self-Confidence and Timing of Entry

Author Info

Tiago Pires
Luís Santos-Pinto

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Luis Santos-Pinto

Abstract

This paper analyzes the impact of overconfidence on the timing of entry in markets, profits, and welfare. To do that the paper uses an endogenous timing model where (i) players have private information about costs and (ii) one player is overconfident and the other is rational. The paper shows that for moderate levels of self-confidence there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of entering the market before the rational player. In this equilibrium self-confidence reduces the profits of the rational player but can increase the profits of the overconfident player provided that cost asymmetries are small. Finally, we show that overconfidence reduces welfare, except when cost asymmetries are very small.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 09.05.

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Length: 23 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:lau:crdeep:09.05

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
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Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-03-22 (All new papers)
NEP-ENT-2009-03-22 (Entrepreneurship)
NEP-MIC-2009-03-22 (Microeconomics)

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This page was last updated on 2009-11-22.

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