The Positive Effects of Biased Self-Perceptions in Firms* | Zendy

Simon Gervais | Zendy; Itay Goldstein | Zendy

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The Positive Effects of Biased Self-Perceptions in Firms*

Author(s) -

Simon Gervais,

Itay Goldstein

Publication year - 2007

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1093/rof/rfm022

Subject(s) - affect (linguistics) , productivity , compensation (psychology) , perception , pareto principle , value (mathematics) , marginal product , microeconomics , set (abstract data type) , economics , social psychology , psychology , operations management , production (economics) , computer science , mathematics , statistics , neuroscience , communication , programming language , macroeconomics

We study a firm in which the marginal productivity of agents' effort increases with the effort of others. We show that the presence of an agent who overestimates his marginal productivity may make all agents better off, including the biased agent himself. This Pareto improvement is obtained even when compensation contracts are set endogenously to maximize firm value. We show that the presence of a leader improves coordination, but self-perception biases can never be Pareto-improving when they affect the leader. Self-perception biases are also shown to affect job assignments within firms and the likelihood and value of mergers. Copyright 2007, Oxford University Press.

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