The Positive Effects of Biased Self-Perceptions in Firms

Posted: 14 Jul 2008

See all articles by Simon Gervais

Simon Gervais

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

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Abstract

We study a firm in which the marginal productivity of agents' effort increases with the effort of others. We show that the presence of an agent who overestimates his marginal productivity may make all agents better off, including the biased agent himself. This Pareto improvement is obtained even when compensation contracts are set endogenously to maximize firm value. We show that the presence of a leader improves coordination, but self-perception biases can never be Pareto-improving when they affect the leader. Self-perception biases are also shown to affect job assignments within firms and the likelihood and value of mergers.

Keywords: D21, D62, L23, G30, G34

Suggested Citation

Gervais, Simon and Goldstein, Itay, The Positive Effects of Biased Self-Perceptions in Firms. Review of Finance, Vol. 11, No. 3, pp. 453-496, 2007. Available at SSRN: https://ssrn.com/abstract=1159309 or http://dx.doi.org/10.1093/rof/rfm022

Simon Gervais (Contact Author)

Duke University - Fuqua School of Business ( email )

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Durham, NC 27708-0120
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HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )

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Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

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