Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26450
Authors: 
De La Rosa, Leonidas Enrique
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2405
Abstract: 
We study the effects of overconfidence in a two-period investment-decision agency setting. Under common priors, agent risk aversion implies inefficiently low first-period investment. In our model, principal and agent disagree about the profitability of the investment decision conditional on a given public signal. An overconfident agent believes that the principal will update her beliefs upwards more often than not. As a consequence, the agent overestimates the benefits of learning from first-period investment. This implies that agent overconfidence mitigates the agency problems arising from the agent's career concerns, even though an overconfident agent bears more project and reputational risk in equilibrium.
Subjects: 
Overconfidence
heterogenous beliefs
career concerns
JEL: 
D83
D84
D86
Document Type: 
Working Paper

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