We examine whether owners' decisions to delegate corporate responsibilities to overconfident managers improve welfare. We develop a dynamic model with product differentiation, where firms compete in cost-reducing 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 when R&D technology is less productive, owners hire overconfident managers who overinvest in cost-reducing R&D. These strategic decisions improve welfare when spillovers are small and R&D productivity is low, or spillovers are large, or product differentiation is strong.
Tondji, J.-B. (2021). Overconfidence and welfare in a differentiated duopoly. Managerial and Decision Economics, 1– 17. https://doi.org/10.1002/mde.3416
Managerial and Decision Economics