Working Paper: CEPR ID: DP12740
Authors: Venkataraman Bhaskar; Caroline Thomas
Abstract: Why do political leaders or managers persist with their pet projects and policies despite bad news? When project continuation is a more informative experiment than project termination, a reputationally concerned leader is biased towards continuation, as it enables her to disclose her private information. Perceived overconfidence on the part of the leader aggravates this tendency, even when the leader is not, in fact, overconfident. Higher-order beliefs regarding overconfidence can induce inefficient equilibrium selection even when it is ``almost common knowledge" that the leader is not overconfident. Thus, a culture where leaders are expected to be overconfident can have undesirable effects even upon leaders who have correct beliefs.
Keywords: overconfidence; policy persistence; misspecified models; noncommon priors; higher-order beliefs
JEL Codes: C73; D82; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputationally concerned leaders (D70) | Project continuation (Y20) |
| Perceived overconfidence (G41) | Project continuation (Y20) |
| Higher-order beliefs regarding overconfidence (D83) | Inefficient equilibrium selection (D59) |
| Culture of overconfidence (G41) | Decision-making outcomes (D91) |