The Effects of Biased Self-Perception in Teams

Abstract

Several finance and economics problems involve a team of agents in which the marginal productivity of any one agent increases with the effort of others on the team. Because the effort of each agent is not observable to any other agents, the performance of the team is negatively affected by a free-rider problem and by a lack of effort coordination across agents. In this context, we show that an agent who mistakenly overestimates her own marginal productivity works harder, thereby increasing the marginal productivity of her teammates who then work harder as well. This not only enhances team performance but may also create a Pareto improvement at the individual level. Indeed, although the biased agent overworks, she benefits from the positive externality that other agents working harder generates. The presence of a team leader improves coordination and team value, but self-perception biases can never be Pareto-improving when they affect the leader. Because self-perception biases naturally make agents work harder, monitoring, even when it is costless, may hurt the team by causing an overinvestment in effort. Interestingly, the benefits of self-perception biases may be long-lived even if agents learn from team performance, as the biased agent attributes the team's success to her own ability, and not to the better coordination of the team.