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Optimal Team Size and Overconfidence

Hendrik Hakenes () and Svetlana Katolnik ()
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Hendrik Hakenes: University of Bonn and CEPR
Svetlana Katolnik: Leibniz Universität Hannover

Group Decision and Negotiation, 2018, vol. 27, issue 4, No 7, 665-687

Abstract: Abstract In a team formation model with endogenous team size, we show that overconfidence may dominate rationality by increasing agents’ individual payoffs in teams. If team members are overconfident in their own ability, effort levels increase and the free rider problem is partially resolved. Because each member believes himself to be more skilled than the other members, agents prefer larger-sized teams only if complementarities are sufficiently strong. From the perspective of individual welfare, overconfidence partially undermines the efficient formation of teams. Although team members can benefit from their overconfidence only if complementarities exist, team formation can even be advantageous if members’ inputs are substitutes as it prevents agents from overinvesting in effort. We consider different extensions, including asymmetric agents, repeated interactions and the roles of monitoring and budget breaking as possible remedies to free riding.

Keywords: Team formation; Team size; Overconfidence; Free riding; Complementarities (search for similar items in EconPapers)
JEL-codes: D2 D62 L23 L25 (search for similar items in EconPapers)
Date: 2018
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