Overconfidence and Team Coordination

Abstract

We model a team in which the marginal productivity of a player increases with the effort of other players on the team. Because the effort of any player is not observable to any other player, the performance of the team is negatively affected by a free-rider problem and by a lack of effort coordination across players. We show that, in this context, the overconfidence of some players not only enhances team performance but may create a Pareto improvement at the individual level. Indeed, because an overconfident player overestimates his marginal productivity, his decision to exert effort does not require as much expected effort from other players. Knowing that this overconfident player works hard and thus increases their marginal productivity, other players work harder too. This concerted effort by all benefits the team, the rational players and, in some cases, the overconfident player, who overworks but benefits from the positive externality that other players working harder brings about. Such Pareto improvement may provide a rationale for individual overconfidence to perpetuate itself in firms and partnerships.