Group Decision and Negotiation

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

Optimal Team Size and Overconfidence

  • Hendrik Hakenes
  • Svetlana KatolnikEmail author


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.


Team formation Team size Overconfidence Free riding Complementarities 

JEL Classification

D2 D62 L23 L25 


Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.


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Authors and Affiliations

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

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