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
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: Suggested Citation