Overconfidence in a Career-Concerns Setting

29 Pages Posted: 25 Sep 2008

See all articles by Leonidas Enrique de la Rosa

Leonidas Enrique de la Rosa

Aarhus University - Department of Economics and Business Economics

Date Written: September 2008

Abstract

We study the effects of overconfidence in a two-period investment-decision agency setting. Under common priors, agent risk aversion implies inefficiently low first-period investment. In our model, principal and agent disagree about the profitability of the investment decision conditional on a given public signal. An overconfident agent believes that the principal will update her beliefs upwards more often than not. As a consequence, the agent overestimates the benefits of learning from first-period investment. This implies that agent overconfidence mitigates the agency problems arising from the agent's career concerns, even though an overconfident agent bears more project and reputational risk in equilibrium.

Keywords: overconfidence, heterogenous beliefs, career concerns

JEL Classification: D83, D84, D86

Suggested Citation

de la Rosa, Leonidas Enrique, Overconfidence in a Career-Concerns Setting (September 2008). CESifo Working Paper Series No. 2405, Available at SSRN: https://ssrn.com/abstract=1273512

Leonidas Enrique De la Rosa (Contact Author)

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Alle 4
Aarhus, 8210
Denmark

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