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Overconfidence in a Career-Concerns Setting

  • Leonidas Enrique De La Rosa

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2405.

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Date of creation: 2008
Date of revision:
Handle: RePEc:ces:ceswps:_2405
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  1. Robert Gibbons & Kevin J. Murphy, 1991. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc.
  2. Tobias Adrian & Mark M. Westerfield, 2008. "Disagreement and learning in a dynamic contracting model," Staff Reports 269, Federal Reserve Bank of New York.
  3. Santos-Pinto, Luís, 2003. "Positive self-image and incentives in organizations," MPRA Paper 3141, University Library of Munich, Germany, revised 14 Feb 2007.
  4. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
  5. Benjamin Hermalin., 1991. "Managerial Preferences Concerning Risky Projects," Economics Working Papers 91-168, University of California at Berkeley.
  6. Eyster, Erik & Rabin, Matt, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt6xf4782t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  8. 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.
  9. Holmstrom, Bengt & Ricart i Costa, Joan, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 835-60, November.
  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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