Research Summary
Research Summary
A Strategic Rationale for Having Overconfident Managers, 2004
Description
We analyze whether it might be desirable for a firm to hire an overconfident manager for strategic reasons. We analyze a tournament type version of Bertrand competition and a linear demand Cournot model. In each case there is an R&D stage where firms can invest in cost reduction before product market competition takes place. It is this R&D stage where overconfidence kicks in. Though under some qualifications, we find that under both specifications firms want to delegate to overconfident managers. The fact that both under price and quantity competition delegation works in the same direction is distinct to the standard literature on strategic delegation where optimal delegation in those two cases works in opposite directions. The models in this chapter not only help explain the empirical evidence that executives are prone to overconfidence but also deliver testable implications.