Advertisement

Group Decision and Negotiation

, Volume 27, Issue 4, pp 665–687 | Cite as

Optimal Team Size and Overconfidence

  • Hendrik Hakenes
  • Svetlana Katolnik
Article
  • 48 Downloads

Abstract

In a team formation model with endogenous team size, we show that overconfidence may dominate rationality by increasing agents’ individual payoffs in teams. If team members are overconfident in their own ability, effort levels increase and the free rider problem is partially resolved. Because each member believes himself to be more skilled than the other members, agents prefer larger-sized teams only if complementarities are sufficiently strong. From the perspective of individual welfare, overconfidence partially undermines the efficient formation of teams. Although team members can benefit from their overconfidence only if complementarities exist, team formation can even be advantageous if members’ inputs are substitutes as it prevents agents from overinvesting in effort. We consider different extensions, including asymmetric agents, repeated interactions and the roles of monitoring and budget breaking as possible remedies to free riding.

Keywords

Team formation Team size Overconfidence Free riding Complementarities 

JEL Classification

D2 D62 L23 L25 

Notes

Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.

References

  1. Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Am Econ Rev 62(5):777–795.  https://doi.org/10.1109/EMR.1975.4306431 Google Scholar
  2. Alicke MD, Klotz ML, Breitenbecher DL, Yurak TJ, Vredenburg DS (1995) Personal contact, individuation, and the better-than-average effect. J Personal Soc Psychol 68(5):804–825.  https://doi.org/10.1037/0022-3514.68.5.804 CrossRefGoogle Scholar
  3. Bar-Isaac H (2007) Something to prove: reputation in teams. RAND J Econ 38(2):495–511.  https://doi.org/10.1111/j.1756-2171.2007.tb00080.x CrossRefGoogle Scholar
  4. Becker GS, Murphy KM (1992) The division of labor, coordination costs, and knowledge. Q J Econ 107(4):1137–1160.  https://doi.org/10.2307/2118383 CrossRefGoogle Scholar
  5. Becker W, Dietz J (2004) R&D cooperation and innovation activities of firms—evidence for the german manufacturing industry. Res Policy 33(2):209–223.  https://doi.org/10.1016/j.respol.2003.07.003 CrossRefGoogle Scholar
  6. Ben-Porath E, Kahneman M (1996) Communication in repeated games with private monitoring. J Econ Theory 70(2):281–297.  https://doi.org/10.1006/jeth.1996.0090 CrossRefGoogle Scholar
  7. Ben-Porath E, Kahneman M (2003) Communication in repeated games with costly monitoring. Games Econ Behav 44(2):227–250.  https://doi.org/10.1016/S0899-8256(03)00022-8 CrossRefGoogle Scholar
  8. Bernardo AE, Welch I (2001) On the evolution of overconfidence and entrepreneurs. J Econ Manag Strategy 10(3):301–330.  https://doi.org/10.1111/j.1430-9134.2001.00301.x CrossRefGoogle Scholar
  9. Bernheim BD, Peleg B, Whinston MD (1987) Coalition-proof nash equilibria i. concepts. J Econ Theory 42(1):1–12.  https://doi.org/10.1016/0022-0531(87)90099-8 CrossRefGoogle Scholar
  10. Bonatti A, Hörner J (2017) Learning to disagree in a game of experimentation. J Econ Theory 169:234–269.  https://doi.org/10.1016/j.jet.2017.02.007 CrossRefGoogle Scholar
  11. Bottom WP, Paese PW (1999) Judgment accuracy and the asymmetric cost of errors in distributive bargaining. Group Decis Negot 8(4):349–364.  https://doi.org/10.1023/A:1008698408099 CrossRefGoogle Scholar
  12. Buehler R, Griffin D, Ross M (1994) Exploring the “planning fallacy”: why people underestimate their task completion times. J Personal Soc Psychol 67(3):366–381.  https://doi.org/10.1037/0022-3514.67.3.366 CrossRefGoogle Scholar
  13. Busenitz LW, Barney JB (1997) Differences between entrepreneurs and managers in large organizations: biases and heuristics in strategic decision-making. J Bus Ventur 12(1):9–30.  https://doi.org/10.1016/S0883-9026(96)00003-1 CrossRefGoogle Scholar
  14. Camerer C, Lovallo D (1999) Overconfidence and excess entry: an experimental approach. Am Econ Rev 89(1):306–318.  https://doi.org/10.1257/aer.89.1.306 CrossRefGoogle Scholar
  15. Che Y-K, Yoo S-W (2001) Optimal incentives for teams. Am Econ Rev 91(3):525–541.  https://doi.org/10.1257/aer.91.3.525 CrossRefGoogle Scholar
  16. Chowdhury PR (2003) Inefficiencies in a model of team formation. Group Decis Negot 12(3):195–215.  https://doi.org/10.1023/A:1023394616587 CrossRefGoogle Scholar
  17. Cooper AC, Woo CY, Dunkelberg WC (1988) Entrepreneurs’ perceived chances for success. J Bus Ventur 3(2):97–108.  https://doi.org/10.1016/0883-9026(88)90020-1 CrossRefGoogle Scholar
  18. Cooper DJ, Saral KJ (2013) Entrepreneurship and team participation: an experimental study. Eur Econ Rev 59:126–140.  https://doi.org/10.1016/j.euroecorev.2013.01.003 CrossRefGoogle Scholar
  19. Corgnet B (2010) Team formation and self-serving biases. J Econ Manag Strategy 19(1):117–135.  https://doi.org/10.1111/j.1530-9134.2009.00247.x CrossRefGoogle Scholar
  20. Corgnet B, Sutan A, Veszteg RF (2011) My teammate, myself and I: experimental evidence on equity and equality norms. J Socio-Econ 40(4):347–355.  https://doi.org/10.1016/j.socec.2010.09.005 CrossRefGoogle Scholar
  21. Corts KS (2007) Teams versus individual accountability: solving multitask problems through job design. RAND J Econ 38(2):467–479.  https://doi.org/10.1111/j.1756-2171.2007.tb00078.x CrossRefGoogle Scholar
  22. Daniel K, Hirshleifer D, Subrahmanyam A (1998) Investor psychology and security market under—and overreactions. J Financ 53(6):1839–1885.  https://doi.org/10.1111/0022-1082.00077 CrossRefGoogle Scholar
  23. Dargnies M-P (2012) Men too sometimes shy away from competition: the case of team competition. Manag Sci 58(11):1982–2000.  https://doi.org/10.1287/mnsc.1120.1542 CrossRefGoogle Scholar
  24. De Bondt WF M, Thaler R H (1995) Financial decision-making in markets and firms: a behavioral perspective. In: Jarrow R, Maksimovic V, Ziemba W T (eds) Handbook in operations research and management science, 9th edn. Elsevier, Amsterdam, pp 385–410.  https://doi.org/10.1016/S0927-0507(05)80057-X Google Scholar
  25. Eswaran M, Kotwal A (1984) The moral hazard of budget-breaking. RAND J Econ 15(4):578–581CrossRefGoogle Scholar
  26. Fang H, Moscarini G (2005) Morale hazard. J Monet Econ 52(4):749–777.  https://doi.org/10.1016/j.jmoneco.2005.02.001 CrossRefGoogle Scholar
  27. Forbes DP (2005) Are some entrepreneurs more overconfident than others? J Bus Ventur 20(5):623–640.  https://doi.org/10.1016/j.jbusvent.2004.05.001 CrossRefGoogle Scholar
  28. Gershkov A, Li J, Schweinzer P (2009) Efficient tournaments within teams. RAND J Econ 40(1):103–119.  https://doi.org/10.1111/j.1756-2171.2008.00057.x CrossRefGoogle Scholar
  29. Gervais S, Goldstein I (2007) The positive effects of biased self-perceptions in firms. Rev Financ 11(3):453–496.  https://doi.org/10.1093/rof/rfm022 CrossRefGoogle Scholar
  30. Gervais S, Heaton JB, Odean T (2011) Overconfidence, compensation contracts, and capital budgeting. J Financ 66(5):1735–1777.  https://doi.org/10.1111/j.1540-6261.2011.01686.x CrossRefGoogle Scholar
  31. Gervais S, Odean T (2001) Learning to be overconfident. Rev Financ Stud 14(1):1–27.  https://doi.org/10.1093/rfs/14.1.1 CrossRefGoogle Scholar
  32. Hales J (2009) Are investors really willing to agree to disagree? An experimental investigation of how disagreement and attention to disagreement affect trading behavior. Organ Behav Hum Decis Process 108(2):230–241.  https://doi.org/10.1016/j.obhdp.2008.08.003 CrossRefGoogle Scholar
  33. Hammond PJ (1981) Ex-ante and ex-post welfare optimality under uncertainty. Economica 48(191):235–250.  https://doi.org/10.2307/2552915 CrossRefGoogle Scholar
  34. Harris M, Raviv A (1993) Differences of opinion make a horse race. Rev Financ Stud 6(3):473–506.  https://doi.org/10.1093/rfs/5.3.473 CrossRefGoogle Scholar
  35. Hausken K (1997) Game-theoretic and behavioral negotiation theory. Group Decis Negot 6(6):511–528.  https://doi.org/10.1023/A:1008684225781 CrossRefGoogle Scholar
  36. Hmieleski KM, Baron RA (2009) Entrepreneurs’ optimism and new venture performance: a social cognitive perspective. Acad Manag J 52(3):473–488.  https://doi.org/10.5465/AMJ.2009.41330755 CrossRefGoogle Scholar
  37. Holmström B (1982) Moral hazard in teams. Bell J Econ 13(2):324–340.  https://doi.org/10.2307/3003457 CrossRefGoogle Scholar
  38. Holmström B, Milgrom P (1990) Regulating trade among agents. J Inst Theor Econ 146(1):85–105Google Scholar
  39. Hong H, Stein JC (2007) Disagreement and the stock market. J Econ Perspect 21(2):109–128.  https://doi.org/10.1257/jep.21.2.109 CrossRefGoogle Scholar
  40. Huddart S, Liang PJ (2003) Accounting in partnerships. Am Econ Rev 93(2):410–414.  https://doi.org/10.1257/000282803321947434 CrossRefGoogle Scholar
  41. Huddart S, Liang PJ (2005) Profit sharing and monitoring in partnerships. J Account Econ 40(1–3):153–187.  https://doi.org/10.1016/j.jacceco.2005.04.008 CrossRefGoogle Scholar
  42. Itoh H (1991) Incentives to help in multi-agent situations. Econometrica 59(3):611–636.  https://doi.org/10.2307/2938221 CrossRefGoogle Scholar
  43. Kandel E, Lazear EP (1992) Peer pressure and partnerships. J Polit Econ 100(4):801–817.  https://doi.org/10.1086/261840 CrossRefGoogle Scholar
  44. Kandel E, Pearson ND (1995) Differential interpretation of public signals and trade in speculative markets. J Polit Econ 103(4):831–872.  https://doi.org/10.1086/262005 CrossRefGoogle Scholar
  45. Krueger J (1998) Enhancement bias in descriptions of self and others. Personal Soc Psychol Bull 24(5):505–516.  https://doi.org/10.1177/0146167298245006 CrossRefGoogle Scholar
  46. Kugler T, Rapoport A, Pazy A (2010) Public good provision in inter-team conflicts: effects of asymmetry and profit-sharing rule. J Behav Decis Mak 23(4):421–438.  https://doi.org/10.1002/bdm.667 Google Scholar
  47. Kuhn P, Villeval MC (2015) Are women more attracted to co-operation than men? Econ J 125(582):115–140.  https://doi.org/10.1111/ecoj.12122 CrossRefGoogle Scholar
  48. Kurz M (2009) Rational diverse beliefs and economic volatility. In: Hens T, Schenk-Hoppé KR (eds) Handbook of financial markets: dynamics and evolution. Elsevier, Amsterdam, pp 439–506.  https://doi.org/10.1016/B978-012374258-2.50012-9 CrossRefGoogle Scholar
  49. Kvaløy O, Olsen TE (2006) Team incentives in relational employment contracts. J Labor Econ 24(1):139–169.  https://doi.org/10.1086/497821 CrossRefGoogle Scholar
  50. Kyle AS, Wang FA (1997) Speculation duopoly with agreement to disagree: can overconfidence survive the market test? J Financ 52(5):2073–2090.  https://doi.org/10.1111/j.1540-6261.1997.tb02751.x CrossRefGoogle Scholar
  51. Latham GP, Locke EA (1991) Self-regulation through goal setting. Organ Behav Hum Decis Process 50(2):212–247.  https://doi.org/10.1016/0749-5978(91)90021-K CrossRefGoogle Scholar
  52. Legros P, Matsushima H (1991) Efficiency in partnerships. J Econ Theory 55(2):296–322.  https://doi.org/10.1016/0022-0531(91)90042-3 CrossRefGoogle Scholar
  53. Legros P, Matthews SA (1993) Efficient and nearly-efficient partnerships. Rev Econ Stud 60(3):599–611.  https://doi.org/10.2307/2298126 CrossRefGoogle Scholar
  54. Levin J, Tadelis S (2005) Profit sharing and the role of professional partnerships. Q J Econ 120(1):131–171.  https://doi.org/10.1162/0033553053327506 Google Scholar
  55. Lewinsohn PM, Mischel W, Chaplin W, Barton R (1980) Social competence and depression: the role of illusory self-perceptions. J Abnorm Psychol 89(2):203–212.  https://doi.org/10.1037/0021-843X.89.2.203 CrossRefGoogle Scholar
  56. Liang PJ, Rajan MV, Ray K (2008) Optimal team size and monitoring in organizations. Account Rev 83(3):789–822.  https://doi.org/10.2308/accr.2008.83.3.789 CrossRefGoogle Scholar
  57. Ma C-T (1988) Unique implementation of incentive contracts with many agents. Rev Econ Stud 55(4):555–572.  https://doi.org/10.2307/2297405 CrossRefGoogle Scholar
  58. Marschak J, Radner R (1972) Economic theory of teams. Yale University Press, New HavenGoogle Scholar
  59. McAfee RP, McMillan J (1992) Bidding rings. Am Econ Rev 82(3):579–599Google Scholar
  60. Mertins V, Hoffeld W (2015) Do overconfident workers cooperate less? The relationship between overconfidence and cooperation in team production. Manag Decis Econ 36(4):265–274.  https://doi.org/10.1002/mde.2667 CrossRefGoogle Scholar
  61. Miller NH (1997) Efficiency in partnerships with joint monitoring. J Econ Theory 77(2):285–299.  https://doi.org/10.1006/jeth.1997.2332 CrossRefGoogle Scholar
  62. Morris S (1995) The common prior assumption in economic theory. Econ Philos 11(2):227–253.  https://doi.org/10.1017/S0266267100003382 CrossRefGoogle Scholar
  63. Mukherjee A, Vasconcelos L (2011) Optimal job design in the presence of implicit contracts. RAND J Econ 42(1):44–69.  https://doi.org/10.1111/j.1756-2171.2010.00125.x CrossRefGoogle Scholar
  64. Nielsen CK (2003) Floating exchange rates versus a monetary union under rational beliefs: the role of endogenous uncertainty. Econ Theory 21(2–3):293–315.  https://doi.org/10.1007/s00199-002-0312-9 CrossRefGoogle Scholar
  65. Pirinsky C (2013) Confidence and economic attitudes. J Econ Behav Organ 91:139–158.  https://doi.org/10.1016/j.jebo.2013.04.013 CrossRefGoogle Scholar
  66. Prendergast C (1999) The provision of incentives in firms. J Econ Lit 37(1):7–63.  https://doi.org/10.1257/jel.37.1.7 CrossRefGoogle Scholar
  67. Prussia GE, Anderson JS, Manz CC (1998) Self-leadership and performance outcomes: the mediating influence of self-efficacy. J Organ Behav 19(5):523–538.  https://doi.org/10.1002/(SICI)1099-1379(199809)19:5%3c523::AID-JOB860%3e3.0.CO;2-I CrossRefGoogle Scholar
  68. Qian Y (1994) Incentives and loss of control in an optimal hierarchy. Rev Econ Stud 61(3):527–544.  https://doi.org/10.2307/2297902 CrossRefGoogle Scholar
  69. Radner R (1985) Repeated principal-agent games with discounting. Econometrica 53(5):1173–1198.  https://doi.org/10.2307/1911017 CrossRefGoogle Scholar
  70. Radner R (1986) Repeated partnership games with imperfect monitoring and no discounting. Rev Econ Stud 53(1):43–57.  https://doi.org/10.2307/2297590 CrossRefGoogle Scholar
  71. Radner R, Myerson R, Maskin E (1986) An example of a repeated partnership game with discounting and with uniformly inefficient equilibria. Rev Econ Stud 53(1):59–69.  https://doi.org/10.2307/2297591 CrossRefGoogle Scholar
  72. Rahman D, Obara I (2010) Mediated partnerships. Econometrica 78(1):285–308.  https://doi.org/10.3982/ECTA6131 CrossRefGoogle Scholar
  73. Rasmusen E (1987) Moral hazard in risk-averse teams. RAND J Econ 18(3):428–435.  https://doi.org/10.2307/2555607 CrossRefGoogle Scholar
  74. Rayo L (2007) Relational incentives and moral hazard in teams. Rev Econ Stud 74(3):937–963.  https://doi.org/10.1111/j.1467-937X.2007.00443.x CrossRefGoogle Scholar
  75. Rulliere J-L, Santos-Pinto L, Vialle I (2011) Self-confidence and teamwork: an experimental test. Unpublished manuscript, Université Lyon 2Google Scholar
  76. Sandroni A, Squintani F (2007) Overconfidence, insurance, and paternalism. Am Econ Rev 97(5):1994–2004.  https://doi.org/10.1257/aer.97.5.1994 CrossRefGoogle Scholar
  77. Santos-Pinto L (2008) Positive self-image and incentives in organizations. Econ J 118(531):1315–1332.  https://doi.org/10.1111/j.1468-0297.2008.02171.x CrossRefGoogle Scholar
  78. Santos-Pinto L (2010) Positive self-image in tournaments. Int Econ Rev 51(2):475–496.  https://doi.org/10.1111/j.1468-2354.2010.00589.x CrossRefGoogle Scholar
  79. Santos-Pinto L, Sobel J (2005) A model of positive self-image in subjective assessments. Am Econ Rev 95(5):1386–1402.  https://doi.org/10.1257/000282805775014245 CrossRefGoogle Scholar
  80. Strausz R (1999) Efficiency in sequential partnerships. J Econ Theory 85(1):140–156.  https://doi.org/10.1006/jeth.1998.2496 CrossRefGoogle Scholar
  81. Taylor SE, Brown JD (1988) Illusion and well-being: a social psychological perspective on mental health. Psychol Bull 103(2):193–210.  https://doi.org/10.1037/0033-2909.103.2.193 CrossRefGoogle Scholar
  82. Taylor SE, Brown JD (1994) Positive illusions and well-being revisited: separating fact from fiction. Psychol Bull 116(1):21–27.  https://doi.org/10.1037/0033-2909.116.1.21 CrossRefGoogle Scholar
  83. Van den Steen E (2004) Rational overoptimism (and other biases). Am Econ Rev 94(4):1141–1151.  https://doi.org/10.1257/0002828042002697 CrossRefGoogle Scholar
  84. Van den Steen E (2011) Overconfidence by Bayesian-rational agents. Manag Sci 57(5):884–896.  https://doi.org/10.1287/mnsc.1110.1323 CrossRefGoogle Scholar
  85. Vidal JBI, Möller M (2007) When should leaders share information with their subordinates? J Econ Manag Strateg 16(2):251–283.  https://doi.org/10.1111/j.1530-9134.2007.00139.x CrossRefGoogle Scholar
  86. Weinstein ND (1980) Unrealistic optimism about future life events. J Personal Soc Psychol 39(5):806–820.  https://doi.org/10.1037/0022-3514.39.5.806 CrossRefGoogle Scholar
  87. Weitzman M, Kruse D (1990) Profit sharing and productivity. In: Blinder A (ed) Paying for productivity. Brookings, Washington, DC, pp 95–142Google Scholar
  88. Ziv A (1993) Performance measures and optimal organization. J Law Econ Organ 9(1):30–50Google Scholar
  89. Ziv A (2000) Information technology and optimal firm structure. J Account Res 38(2):297–328.  https://doi.org/10.2307/2672935 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  1. 1.Institute for Financial Economics and StatisticsUniversity of Bonn and CEPRBonnGermany
  2. 2.Institute of Managerial AccountingLeibniz Universität HannoverHannoverGermany

Personalised recommendations