Evolution of Information Projection Bias through Costly Communication in Overlapping Generations Organizations

In organizations with overlapping generations, behavioral bias affects performance through promotion decisions. This study focuses on information projection bias and examines its effects on communication efforts and the overall performance of an organization adopting a performance-based promotion system to select the next-generation manager among current subordinates. We show that the bias generally disrupts communication between an incumbent manager and subordinates and that the expected overall performance is single-peaked with respect to the manager's bias. When considering the bias distribution among newly promoted managers, we find that a more biased group is likely to select a more biased manager. This trend becomes stronger over generations and the expected overall performance increases when the variety of the bias degree is restricted and communication efforts are complements. By contrast, in a competitive organization, the manager's bias diminishes over generations. Nonetheless, the overall performance decreases when the variety of the bias degree is sufficient. Our results contribute to the understanding of the effects of diversity in an organization on its performance.