Optimism and timing of market entry: How beliefs and information distortion create market leadership

Abstract

AbstractThis paper analyzes the relation between the timing of entry in markets and firms’ beliefs about the state of the world. We further study whether firms have incentives to become optimistic. We consider an endogenous timing model with incomplete information about demand and show the existence of a unique perfect Bayesian equilibrium where Bayesian firms with optimistic beliefs become market leaders and firms with pessimistic beliefs become market followers. Firms never become market followers when they are able to choose their beliefs by forgetting bad news. Our findings provide a justification for firms hiring and retaining managers with biased beliefs.