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Overconfidence in a Career-Concerns Setting

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  • Leonidas Enrique De La Rosa

Abstract

We study the effects of overconfidence in a two-period investment-decision agency setting. Under common priors, agent risk aversion implies inefficiently low first-period investment. In our model, principal and agent disagree about the profitability of the investment decision conditional on a given public signal. An overconfident agent believes that the principal will update her beliefs upwards more often than not. As a consequence, the agent overestimates the benefits of learning from first-period investment. This implies that agent overconfidence mitigates the agency problems arising from the agent’s career concerns, even though an overconfident agent bears more project and reputational risk in equilibrium.

Suggested Citation

  • Leonidas Enrique De La Rosa, 2008. "Overconfidence in a Career-Concerns Setting," CESifo Working Paper Series 2405, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2405
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2405.pdf
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    References listed on IDEAS

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    1. Luís Santos-Pinto, 2008. "Positive Self-image and Incentives in Organisations," Economic Journal, Royal Economic Society, vol. 118(531), pages 1315-1332, August.
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    4. Simon Gervais & Itay Goldstein, 2007. "The Positive Effects of Biased Self-Perceptions in Firms," Review of Finance, European Finance Association, vol. 11(3), pages 453-496.
    5. Erik Eyster & Matthew Rabin, 2005. "Cursed Equilibrium," Econometrica, Econometric Society, vol. 73(5), pages 1623-1672, September.
    6. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    7. Hermalin, Benjamin E, 1993. "Managerial Preferences Concerning Risky Projects," Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(1), pages 127-135, April.
    8. Tobias Adrian & Mark M. Westerfield, 2009. "Disagreement and Learning in a Dynamic Contracting Model," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3873-3906, October.
    9. Bengt Holmstrom & Joan Ricart i Costa, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 835-860.
    10. Pinto, Luis Santos, 2007. "Positive Self-Image and Incentives in Organizations," FEUNL Working Paper Series wp509, Universidade Nova de Lisboa, Faculdade de Economia.
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    More about this item

    Keywords

    overconfidence; heterogenous beliefs; career concerns;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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