Department of Economics and Business Economics

Overconfidence and Moral Hazard

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Overconfidence and Moral Hazard. / de la Rosa, Leonidas Enrique.

In: Games and Economic Behavior, Vol. 73, No. 2, 11.2011, p. 429 - 451.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Harvard

de la Rosa, LE 2011, 'Overconfidence and Moral Hazard', Games and Economic Behavior, vol. 73, no. 2, pp. 429 - 451. https://doi.org/10.1016/j.geb.2011.04.001

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MLA

Vancouver

de la Rosa LE. Overconfidence and Moral Hazard. Games and Economic Behavior. 2011 Nov;73(2):429 - 451. https://doi.org/10.1016/j.geb.2011.04.001

Author

de la Rosa, Leonidas Enrique. / Overconfidence and Moral Hazard. In: Games and Economic Behavior. 2011 ; Vol. 73, No. 2. pp. 429 - 451.

Bibtex

@article{562833e9ec284241afd8b4b2ae0cc18a,
title = "Overconfidence and Moral Hazard",
abstract = "In this paper, I study the effects of overconfidence on incentive contracts ina moral-hazard framework. Agent overconfidence can have conflicting effects onthe equilibrium contract. On the one hand, an optimistic or overconfident agentdisproportionately values success-contingent payments, and thus prefershigher-powered incentives. On the other hand, if the agent overestimatesthe extent to which his actions affect outcomes,lower-powered incentives are sufficient to induce any given effort level. Ifthe agent is moderately overconfident, the latter effect dominates. Becausethe agent bears less risk in this case, there are efficiency gains stemmingfrom his overconfidence. If the agent is significantly overconfident, theformer effect dominates; the agent is then exposed to an excessive amount ofrisk, and any gains arise only from risk-sharing under disagreement. An increase inoptimism or overconfidence increases the effort level implementedin equilibrium.",
keywords = "overconfidence, heterogeneous beliefs, moral hazard",
author = "{de la Rosa}, {Leonidas Enrique}",
year = "2011",
month = nov,
doi = "10.1016/j.geb.2011.04.001",
language = "English",
volume = "73",
pages = "429 -- 451",
journal = "Games and Economic Behavior",
issn = "0899-8256",
publisher = "Academic Press",
number = "2",

}

RIS

TY - JOUR

T1 - Overconfidence and Moral Hazard

AU - de la Rosa, Leonidas Enrique

PY - 2011/11

Y1 - 2011/11

N2 - In this paper, I study the effects of overconfidence on incentive contracts ina moral-hazard framework. Agent overconfidence can have conflicting effects onthe equilibrium contract. On the one hand, an optimistic or overconfident agentdisproportionately values success-contingent payments, and thus prefershigher-powered incentives. On the other hand, if the agent overestimatesthe extent to which his actions affect outcomes,lower-powered incentives are sufficient to induce any given effort level. Ifthe agent is moderately overconfident, the latter effect dominates. Becausethe agent bears less risk in this case, there are efficiency gains stemmingfrom his overconfidence. If the agent is significantly overconfident, theformer effect dominates; the agent is then exposed to an excessive amount ofrisk, and any gains arise only from risk-sharing under disagreement. An increase inoptimism or overconfidence increases the effort level implementedin equilibrium.

AB - In this paper, I study the effects of overconfidence on incentive contracts ina moral-hazard framework. Agent overconfidence can have conflicting effects onthe equilibrium contract. On the one hand, an optimistic or overconfident agentdisproportionately values success-contingent payments, and thus prefershigher-powered incentives. On the other hand, if the agent overestimatesthe extent to which his actions affect outcomes,lower-powered incentives are sufficient to induce any given effort level. Ifthe agent is moderately overconfident, the latter effect dominates. Becausethe agent bears less risk in this case, there are efficiency gains stemmingfrom his overconfidence. If the agent is significantly overconfident, theformer effect dominates; the agent is then exposed to an excessive amount ofrisk, and any gains arise only from risk-sharing under disagreement. An increase inoptimism or overconfidence increases the effort level implementedin equilibrium.

KW - overconfidence, heterogeneous beliefs, moral hazard

U2 - 10.1016/j.geb.2011.04.001

DO - 10.1016/j.geb.2011.04.001

M3 - Journal article

VL - 73

SP - 429

EP - 451

JO - Games and Economic Behavior

JF - Games and Economic Behavior

SN - 0899-8256

IS - 2

ER -