Confidence bias and advertising in imperfectly competitive markets

Abstract

The purpose of this paper is to investigate whether an owner can enhance corporate profit by delegating responsibility to a chief executive officer who has a biased view of his or her marketing ability. We develop a model of imperfect competition where firms compete in advertising and output. Before competition takes place, each owner makes a strategic decision whether to hire a manager who is overconfident, underconfident, or rationally confident in their marketing ability. In a strategic setting, the results reveal that it is never optimal for owners to hire managers who are rationally confident. Owners will hire managers who are either overconfident or underconfident, depending upon whether advertising is constructive or combative.