Overconfidence and welfare in a differentiated duopoly

Tondji, J.-B. (2021). Overconfidence and welfare in a differentiated duopoly. Managerial and Decision Economics, 1–17. https://doi.org/10.1002/mde.3416

34 Pages Posted: 10 Apr 2020 Last revised: 27 Jul 2021

See all articles by Jean-Baptiste Tondji

Jean-Baptiste Tondji

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - Economics and Finance; Department of Economics and Finance, University of Texas Rio Grande Valley

Date Written: March 16, 2020

Abstract

We examine whether owners' decisions to delegate responsibilities to overconfident managers improve welfare. We develop a duopoly model with product differentiation, where firms compete in research and development (R&D) and output . Before firms compete, each owner makes a strategic decision whether to hire an overconfident manager. The results reveal that under not too much productive R&D technology, it is optimal for owners to hire overconfident managers. Owners will hire overconfident managers who over-invest in R&D, and this decision improves welfare if either R&D productivity is low, or spillovers are large, or products are less substitutes.

Keywords: Product differentiation, Overconfidence, R&D, Welfare, Delegation

JEL Classification: D43, L13, L21, O32

Suggested Citation

Tondji, Jean-Baptiste, Overconfidence and welfare in a differentiated duopoly (March 16, 2020). Tondji, J.-B. (2021). Overconfidence and welfare in a differentiated duopoly. Managerial and Decision Economics, 1–17. https://doi.org/10.1002/mde.3416, Available at SSRN: https://ssrn.com/abstract=3555348 or http://dx.doi.org/10.2139/ssrn.3555348

Jean-Baptiste Tondji (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - Economics and Finance ( email )

1201 W. University Dr.
Edinburg, TX
United States

Department of Economics and Finance, University of Texas Rio Grande Valley ( email )

1201 W. University Drive
Edinburg, TX 78541
United States
956-665-2825 (Phone)

HOME PAGE: http://https://sites.google.com/site/jbtondjicom

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