The Man(ager) Who Knew Too Much
52 Pages Posted: 5 Dec 2019 Last revised: 15 Jul 2020
Date Written: July 14, 2020
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: Suggested Citation