Information gathering by overconfident agents

Abstract

AbstractA principal hires an agent to both gather information about a project's costs and implement it. The agent's information‐gathering effort and what he learns are his private information. I allow the agent to be overconfident in the sense that he underestimates his expected cost of implementation and study the effects this overconfidence has on the efficiency of information acquisition and implementation. Overconfidence makes the agent more willing to accept a given contract but may dampen his incentive to gather information. As a result, information may not be gathered in equilibrium due solely to the agent's overconfidence, which causes inefficiencies in the project's implementation. When the agent's information‐gathering cost is low enough, the principal's payoff is nonmonotonic in the degree of overconfidence, increasing for both low and high levels of overconfidence, but decreasing for intermediate levels.