The Positive Effects of Biased Self-Perceptions in Firms

Gervais, Simon; Goldstein, Itay

doi:10.2139/ssrn.963249

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The Positive Effects of Biased Self-Perceptions in Firms

47 Pages Posted: 15 Feb 2007

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

There are 2 versions of this paper

Date Written: July 2007

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: Overconfidence, Complementarities, Firm Production and Organization, Leadership, Mergers

JEL Classification: D21, D62, L23, G30, G34

Suggested Citation: Suggested Citation

Gervais, Simon and Goldstein, Itay, The Positive Effects of Biased Self-Perceptions in Firms (July 2007). Available at SSRN: https://ssrn.com/abstract=963249 or http://dx.doi.org/10.2139/ssrn.963249