IDEAS home Printed from https://ideas.repec.org/p/unl/novafr/wp2108.html
   My bibliography  Save this paper

Keeping up with the Joneses: economic impacts of overconfidence in micro-entrepreneurs

Author

Listed:
  • Julia Seither

Abstract

This paper investigates the effects of incorrect beliefs over relative firm performance on micro-firm outputs through a randomized field experiment in Mozambique. At baseline, 76% of firm owners in the bottom of the distribution are overconfident about their firm’s performance. The estimates reveal that correcting these beliefs through a simple, easily scalable information experiment closes the performance gap between treated firms in the bottom of the distribution at baseline and average and top firms by almost 43%. Moreover, the treatment increases the time a firm owner allocates to her business, improves strategic cooperation with the most important business partners, and affects the pricing strategy of treated firm owners. My results suggest that incorrect beliefs about relative performance are a binding constraint to firm growth that have large implications for managerial behavior and firm outcomes.

Suggested Citation

  • Julia Seither, 2021. "Keeping up with the Joneses: economic impacts of overconfidence in micro-entrepreneurs," NOVAFRICA Working Paper Series wp2108, Universidade Nova de Lisboa, Nova School of Business and Economics, NOVAFRICA.
    • Handle: RePEc:unl:novafr:wp2108
    as

    Download full text from publisher

    File URL: https://novafrica.org/wp-content/uploads/2021/04/2108.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Azmat, Ghazala & Iriberri, Nagore, 2010. "The importance of relative performance feedback information: Evidence from a natural experiment using high school students," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 435-452, August.
    2. Joseph P. Romano & Michael Wolf, 2005. "Stepwise Multiple Testing as Formalized Data Snooping," Econometrica, Econometric Society, vol. 73(4), pages 1237-1282, July.
    3. Christopher Blattman & Julian C. Jamison & Margaret Sheridan, 2017. "Reducing Crime and Violence: Experimental Evidence from Cognitive Behavioral Therapy in Liberia," American Economic Review, American Economic Association, vol. 107(4), pages 1165-1206, April.
    4. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2014. "Business training and female enterprise start-up, growth, and dynamics: Experimental evidence from Sri Lanka," Journal of Development Economics, Elsevier, vol. 106(C), pages 199-210.
    5. Dalton, Patricio & Rüschenpöhler, Julius & Uras, Burak & Zia, Bilal, 2020. "Curating Local Knowledge : Experimental Evidence from Small Retailers in Indonesia (Revision of DP 2019-015)," Discussion Paper 2020-033, Tilburg University, Center for Economic Research.
    6. Eriksson, Tor & Poulsen, Anders & Villeval, Marie Claire, 2009. "Feedback and incentives: Experimental evidence," Labour Economics, Elsevier, vol. 16(6), pages 679-688, December.
    7. Duflo, Esther & Glennerster, Rachel & Kremer, Michael, 2008. "Using Randomization in Development Economics Research: A Toolkit," Handbook of Development Economics, in: T. Paul Schultz & John A. Strauss (ed.), Handbook of Development Economics, edition 1, volume 4, chapter 61, pages 3895-3962, Elsevier.
    8. David McKenzie & Christopher Woodruff, 2014. "What Are We Learning from Business Training and Entrepreneurship Evaluations around the Developing World?," The World Bank Research Observer, World Bank, vol. 29(1), pages 48-82.
    9. Camelia M. Kuhnen & Agnieszka Tymula, 2012. "Feedback, Self-Esteem, and Performance in Organizations," Management Science, INFORMS, vol. 58(1), pages 94-113, January.
    10. Michael Kremer & Jean Lee & Jonathan Robinson & Olga Rostapshova, 2013. "Behavioral Biases and Firm Behavior: Evidence from Kenyan Retail Shops," American Economic Review, American Economic Association, vol. 103(3), pages 362-368, May.
    11. Cátia Batista & Marcel Fafchamps & Pedro C. Vicente, 2018. "Keep It Simple: A Field Experiment on Information Sharing in Social Networks," NBER Working Papers 24908, National Bureau of Economic Research, Inc.
    12. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    13. Miriam Bruhn & David McKenzie, 2009. "In Pursuit of Balance: Randomization in Practice in Development Field Experiments," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 200-232, October.
    14. Catia Batista & Julia Seither, 2019. "Aspirations, expectations, identities: behavioral constraints of micro-entrepreneurs," NOVAFRICA Working Paper Series wp1906, Universidade Nova de Lisboa, Nova School of Business and Economics, NOVAFRICA.
    15. Blanco, M. & Dalton, Patricio, 2019. "Generosity and Wealth : Experimental Evidence from Bogota Stratification," Other publications TiSEM 732a238e-a6d3-428b-a062-1, Tilburg University, School of Economics and Management.
    16. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    17. Patricio S Dalton & Julius Rüschenpöhler & Burak Uras & Bilal Zia, 2021. "Curating Local Knowledge: Experimental Evidence from Small Retailers in Indonesia," Journal of the European Economic Association, European Economic Association, vol. 19(5), pages 2622-2657.
    18. Ghazala Azmat & Nagore Iriberri, 2016. "The Provision of Relative Performance Feedback: An Analysis of Performance and Satisfaction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(1), pages 77-110, March.
    19. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, vol. 88(1), pages 19-31, January.
    20. John A. List, 2007. "On the Interpretation of Giving in Dictator Games," Journal of Political Economy, University of Chicago Press, vol. 115, pages 482-493.
    21. repec:oup:qjecon:v:129:y:2014:i:2:p:697-752. is not listed on IDEAS
    22. Anderson, Stephen J. & Lazicky, Christy & Zia, Bilal, 2021. "Measuring the unmeasured: Aggregating, anchoring, and adjusting to estimate small business performance," Journal of Development Economics, Elsevier, vol. 151(C).
    23. Christopher Blattman & Nathan Fiala & Sebastian Martinez, 2014. "Generating Skilled Self-Employment in Developing Countries: Experimental Evidence from Uganda," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 697-752.
    24. Simon Quinn & Christopher Woodruff, 2019. "Experiments and Entrepreneurship in Developing Countries," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 225-248, August.
    25. Beaman, Lori & Magruder, Jeremy & Robinson, Jonathan, 2014. "Minding small change among small firms in Kenya," Journal of Development Economics, Elsevier, vol. 108(C), pages 69-86.
    26. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lang, M & Seither, J, 2022. "The Economics of Women s Entrepreneurship: Evidence from Building Skills in Uganda," Documentos de Trabajo 20563, Universidad del Rosario.
    2. Martin Chegere & Paolo Falco & Marco Nieddiu & Lorenzo Pandolfi & Mattea Stein, 2022. "It’s a Sure Win! Experimental evidence on overconfidence in betting behavior," CSEF Working Papers 655, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonia Grohmann & Lukas Menkhoff & Helke Seitz, 2022. "The Effect of Personalized Feedback on Small Enterprises’ Finances in Uganda," Economic Development and Cultural Change, University of Chicago Press, vol. 70(3), pages 1197-1227.
    2. Lars Ivar Oppedal Berge & Kjetil Bjorvatn & Bertil Tungodden, 2015. "Human and Financial Capital for Microenterprise Development: Evidence from a Field and Lab Experiment," Management Science, INFORMS, vol. 61(4), pages 707-722, April.
    3. Brade, Raphael & Himmler, Oliver & Jäckle, Robert, 2018. "Normatively Framed Relative Performance Feedback – Field Experiment and Replication," MPRA Paper 88830, University Library of Munich, Germany.
    4. Brade, Raphael & Himmler, Oliver & Jäckle, Robert, 2022. "Relative performance feedback and the effects of being above average — field experiment and replication," Economics of Education Review, Elsevier, vol. 89(C).
    5. Gwen-Jiro Clochard & Guillaume Hollard & Julia Wirtz, 2022. "More effort or better technologies? On the effect of relative performance feedback," Bristol Economics Discussion Papers 22/767, School of Economics, University of Bristol, UK.
    6. Vanessa, Mertins & Jeworrek, Sabrina & Vlassopoulos, Michael, 2018. ""The Good News about Bad News": Feedback about Past Organisational Failure Bad ist Impact in Worker Productivity," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181644, Verein für Socialpolitik / German Economic Association.
    7. Valdivia, Martín, 2015. "Business training plus for female entrepreneurship? Short and medium-term experimental evidence from Peru," Journal of Development Economics, Elsevier, vol. 113(C), pages 33-51.
    8. Azmat, Ghazala & Iriberri, Nagore & Bagues, Manuel, 2016. "What you don't know... Can't hurt you? A field experiment on relative performance feedback in higher education," CEPR Discussion Papers 11201, C.E.P.R. Discussion Papers.
    9. Selay Sahan & Euan Phimister, 2022. "Worker Incentives in the Banking Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(2), pages 259-284, April.
    10. Islam, Asad & Lee, Wang-Sheng & Triyana, Margaret & Xia, Xing, 2023. "Improving Health and Safety in the Informal Sector: Evidence from a Randomized Trial in Bangladesh," IZA Discussion Papers 16150, Institute of Labor Economics (IZA).
    11. Stefan Dimitriadis & Rembrand Koning, 2022. "Social Skills Improve Business Performance: Evidence from a Randomized Control Trial with Entrepreneurs in Togo," Management Science, INFORMS, vol. 68(12), pages 8635-8657, December.
    12. David Gill & Zdenka Kissová & Jaesun Lee & Victoria Prowse, 2019. "First-Place Loving and Last-Place Loathing: How Rank in the Distribution of Performance Affects Effort Provision," Management Science, INFORMS, vol. 65(2), pages 494-507, February.
    13. Mckenzie,David J., 2020. "Small Business Training to Improve Management Practices in Developing Countries: Reassessingthe Evidence for 'Training Doesn’t Work'," Policy Research Working Paper Series 9408, The World Bank.
    14. Ertac, Seda & Gümren, Mert & Koçkesen, Levent, 2019. "Strategic feedback in teams: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 1-23.
    15. Ghazala Azmat & Manuel Bagues & Antonio Cabrales & Nagore Iriberri, 2016. "What You Don’t Know... Can’t Hurt You? A Field Experiment on Relative Performance," Working Papers 788, Queen Mary University of London, School of Economics and Finance.
    16. Azmat, Ghazala & Bagues, Manuel & Cabrales, Antonio & Iriberri, Nagore, 2016. "What You Don't Know... Can't Hurt You? A Field Experiment on Relative Performance Feedback in Higher Education," IZA Discussion Papers 9853, Institute of Labor Economics (IZA).
    17. Delius, Antonia & Sterck, Olivier, 2024. "Cash transfers and micro-enterprise performance: Theory and quasi-experimental evidence from Kenya," Journal of Development Economics, Elsevier, vol. 167(C).
    18. Riedel, Nadine & Stüber, Robert, 2019. "Overearning – Revisited," Journal of Economic Psychology, Elsevier, vol. 75(PA).
    19. Gjedrem, William Gilje, 2018. "Relative performance feedback: Effective or dismaying?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 74(C), pages 1-16.
    20. Dobrescu, Isabella & Faravelli, Marco & Megalokonomou, Rigissa & Motta, Alberto, 2019. "Rank Incentives and Social Learning: Evidence from a Randomized Controlled Trial," IZA Discussion Papers 12437, Institute of Labor Economics (IZA).

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:unl:novafr:wp2108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Susana Lopes (email available below). General contact details of provider: https://edirc.repec.org/data/feunlpt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.