The Man(ager) Who Knew Too Much

52 Pages Posted: 5 Dec 2019 Last revised: 15 Jul 2020

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Naveen Gondhi

INSEAD

Date Written: July 14, 2020

Abstract

Better-informed individuals are often unable to ignore their private information when forecasting others’ beliefs. We study how this bias, known as “the curse of knowledge,” affects communication and investment within a firm. A principal utilizes an informed manager’s recommendations when investing. The curse of knowledge leads the manager to over-estimate his ability to convey information, which hampers communication and decreases firm value. However, this same misperception increases the manager’s information acquisition and can increase value when endogenous information is indispensable (e.g., R&D). Finally, we characterize settings where the principal delegates the investment decision only if the manager is cursed.

Keywords: curse of knowledge, cheap talk, disclosure, delegation, belief formation

JEL Classification: D8, D9, G3, G4

Suggested Citation

Banerjee, Snehal and Davis, Jesse and Gondhi, Naveen, The Man(ager) Who Knew Too Much (July 14, 2020). Available at SSRN: https://ssrn.com/abstract=3490117 or http://dx.doi.org/10.2139/ssrn.3490117

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Naveen Gondhi

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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