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Self-Confidence and Timing of Entry

Author

Listed:
  • Tiago Pires
  • Luís 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.

Suggested Citation

  • Tiago Pires & Luís Santos-Pinto, 2008. "Self-Confidence and Timing of Entry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 09.05, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:09.05
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    File URL: http://www.hec.unil.ch/deep/textes/09.05.pdf
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    Keywords

    endogenous timing; entry; overconfidence;

    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, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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