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Information gathering by overconfident agents

Information gathering by overconfident agents A principal hires an agent to both gather information about a project's costs and implement it. The agent's information‐gathering effort and what he learns are his private information. I allow the agent to be overconfident in the sense that he underestimates his expected cost of implementation and study the effects this overconfidence has on the efficiency of information acquisition and implementation. Overconfidence makes the agent more willing to accept a given contract but may dampen his incentive to gather information. As a result, information may not be gathered in equilibrium due solely to the agent's overconfidence, which causes inefficiencies in the project's implementation. When the agent's information‐gathering cost is low enough, the principal's payoff is nonmonotonic in the degree of overconfidence, increasing for both low and high levels of overconfidence, but decreasing for intermediate levels. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Information gathering by overconfident agents

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References (44)

Publisher
Wiley
Copyright
© 2021 Wiley Periodicals LLC
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12424
Publisher site
See Article on Publisher Site

Abstract

A principal hires an agent to both gather information about a project's costs and implement it. The agent's information‐gathering effort and what he learns are his private information. I allow the agent to be overconfident in the sense that he underestimates his expected cost of implementation and study the effects this overconfidence has on the efficiency of information acquisition and implementation. Overconfidence makes the agent more willing to accept a given contract but may dampen his incentive to gather information. As a result, information may not be gathered in equilibrium due solely to the agent's overconfidence, which causes inefficiencies in the project's implementation. When the agent's information‐gathering cost is low enough, the principal's payoff is nonmonotonic in the degree of overconfidence, increasing for both low and high levels of overconfidence, but decreasing for intermediate levels.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Aug 1, 2021

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