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AbstractPerceptions of overconfidence can exacerbate the tendency of reputationally concerned leaders to continue bad projects. Reputation concerns alone induce a bias toward inefficient continuation in a leader receiving information privately. When she is overconfident— or holds a more favorable prior than observers—this tendency is aggravated. This remains true even when she is not really overconfident, but merely perceived to be so. Higher-order beliefs regarding overconfidence induce inefficient equilibrium selection even when there is “almost common knowledge” that the leader is not over-confident. This provides a novel perspective on how culture selects among equilibria: via higher-order beliefs. (JEL D82, D83, Z13)
American Economic Review: Insights – American Economic Association
Published: Jun 1, 2019
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