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Overconfidence and welfare in a differentiated duopoly

Jean‐Baptiste Tondji

Managerial and Decision Economics, 2022, vol. 43, issue 3, 751-767

Abstract: 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.

Date: 2022
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