Self-Confidence and Timing of Entry

Tiago Pires and Luis Santos-Pinto ()

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: This paper analyzes the impact of overconfidence on the timing of entry in markets, profits, and welfare. To do that the paper uses an endogenous timing model where (i) players have private information about costs and (ii) one player is overconfident and the other is rational. The paper shows that for moderate levels of self-confidence there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of entering the market before the rational player. In this equilibrium self-confidence reduces the profits of the rational player but can increase the profits of the overconfident player provided that cost asymmetries are small. Finally, we show that overconfidence reduces welfare, except when cost asymmetries are very small.

Keywords: endogenous timing; entry; overconfidence (search for similar items in EconPapers)
JEL-codes: A12 C72 D43 D82 L10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent and nep-mic
Date: 2008-10

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Persistent link: http://EconPapers.repec.org/RePEc:lau:crdeep:09.05

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