The Positive Effects of Biased Self-Perceptions in Firms
47 Pages Posted: 15 Feb 2007
There are 2 versions of this paper
The Positive Effects of Biased Self-Perceptions in Firms
The Positive Effects of Biased Self-Perceptions in Firms
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
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction
-
On the Evolution of Overconfidence and Entrepreneurs
By Antonio E. Bernardo and Ivo Welch
-
Market Timing and Managerial Portfolio Decisions
By Dirk Jenter
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...
-
Behavioral Corporate Finance: A Survey
By Malcolm P. Baker, Richard S. Ruback, ...