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

Multiple version iconThere 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

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

Simon Gervais

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7683 (Phone)
919-883-5078 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
142
Abstract Views
942
rank
206,211
PlumX Metrics