Positive self-image in tournaments

Santos-Pinto, Luís (2003): Positive self-image in tournaments.

Abstract

This paper analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments. Each worker overestimates his productivity but is aware of the bias in his opponent’s self-assessment. The manager of the firm, on the other hand, correctly assesses workers’ productivities and self-beliefs when setting tournament prizes. The paper shows that, under a variety of circumstances, firms make higher profits when workers have positive self-image than if workers do not. By contrast, workers’ welfare declines due to their own misguided choices.

• Item Type: MPRA Paper
• Institution: Universidade Nova de Lisboa
• Language: English
• Keywords: Self-Image; Tournaments; Behavioral Economics
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts; A - General Economics and Teaching > A1 - General Economics > A12 - Relation of Economics to Other Disciplines

References

Ando, M. (2004). “Overconfidence in Economic Contests.” Working Paper, University of Tokyo.

Athey, S., Milgrom, P., and J. Roberts (1996). Robust Comparative Statics. Unpublished Manuscript.

Baker, G., Jensen, M., and K. Murphy (1988). “Compensation and Incentives: Practice vs. Theory.” Journal of Finance, Vol. XLIII, No. 3, 593- 616.

Brozynski, T., Menkhoff, L., and U. Schmidt (2004). “The Impact of Experience on Risk Taking, Overconfidence, and Herding of Fund Managers: Complementary Survey Evidence.” University of Hannover, mimeo.

Camerer, C. (1991). “Do Markets Correct Biases in Probability Judgment? Evidence from Market Experiments,” in J. Kagel and L. Green (Eds.), Advances in Behavioral Economics, 2, Northwood, NJ: Ablex Publ., 1990, 125- 172.”

Camerer, C. and D. Lovallo (1999). “Overconfidence and Excess Entry: An Experimental Approach.” American Economic Review, Vol. 89, No. 1, 306-318.

Debreu, D. (1952). “A Social Equilibrium Existence Theorem.” Proceedings of the National Academy of Sciences 38, 886-893.

De la Rosa, L. (2005). “Overconfidence and Moral Hazard.” University of California, Berkeley, mimeo.

Deaves, R., Luders, E. and R. Luo (2003). “An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity.” AFA Philadelphia Meetings, EFMA 2004 Basel Meetings Paper.

Fan, K. (1952). “Fixed Point and Minimax Theorems in Locally Convex Topological Linear Spaces.” Proceedings of the National Academy of Sciences 38, 121-126.

Gervais, S. and I. Goldstein (2004). “Overconfidence and Team Coordination.” Duke University mimeo.

Glicksberg, L. (1952). “A Further Generalization of the Kakutani Fixed Point Theorem with Applications to Economics.” Proceedings of the National Academy of Sciences 38, 170-174.

Grossman, J. and O. Hart (1983). “An Analysis of the Principal Agent Problem.” Econometrica 51, 7-45.

Hvide, H. K. (2002). “Pragmatic Beliefs and Overconfidence,” Journal of Economic Behavior and Organization, vol. 48, no. 1, 15—28.

Koh, Winston (1992). “A Note on Modelling Tournaments.” Journal of Economics, Vol. 55, No. 3, 297-308.

Kyle, A. S. and F.A. Wang (1997). “Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?” Journal of Finance, Vol. 52, 2073-2090.

Landier, A. and D. Thesmar (2003). “Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence.” Working Paper, University of Chicago Graduate School of Business.

Lazear, E. and S. Rosen (1981). “Rank-Order Tournaments as Optimum Labor Contracts.” Journal of Political Economy, 89, 841-864.

Malmendier, U. and G. Tate (2002). “Who Makes Acquisitions? CEO Overconfidence and Market’s Reaction.” Working Paper, Harvard University.

Milgrom, P. and J. Roberts (1990). “Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities.” Econometrica, Vol. 58, No. 6, 1255-1277.

Mirrlees, J. (1975). “The Theory of Moral Hazard and Unobservable Behavior. Part I.” Mimeo, Nuffield College, Oxford.

Moscarini, G. and H. Fang (2005). “Morale Hazard.” Journal of Monetary Economics, Vol. 52, 749-777.

Myers, D. (1996). Social Psychology. New York: McGraw-Hill.

Nalebuff B. and J. Stiglitz (1983). “Prizes and Incentives: Towards a General Theory of Compensation and Competition.” Bell Journal of Economics 14, 21-43.

Oberlechner, T. and C. Osler, 2004, Overconfidence in Currency Markets, mimeo, University of Vienna and Brandeis University.

Park, Y. and L. Santos-Pinto (2005). “Forecasts of Relative Performance in Tournaments: Evidence from the Field,” Working Paper, Universidade Nova de Lisboa.

Rabin, M. (1998). “Psychology and Economics,” Journal of Economic Literature, Vol. XXXVI, 11-46.

Simon, M. and S. Houghton (2003). “The Relationship between Overcon- fidence and the Introduction of Risky Products: Evidence from a Field Study.” Academy of Management Journal, Vol. 46, No. 2, 139-149.

Squintani, F. (2006). “Equilibrium and Mistaken Self-Perception.” Economic Theory, Vol. 27, No. 3, 615 - 641.