Delegation, Overconfidence, and Welfare in a Differentiated Duopoly

We derive Bertrand and Cournot equilibria in a differentiated duopoly in which each firm hires a manager to undertake research and development (R&D) and production decisions. We show that manager overconfidence and over-investment occur in each market competition. Furthermore, the Cournot game induces a higher level of overconfidence and more R&D investments than the Bertrand game. However, if R&D spillovers are strong, the price is lower, and output is more abundant in Bertrand than in the Cournot game. Furthermore, Cournot and Bertrand models with overconfident managers in- duce low prices, massive productions, and are more efficient if R&D productivity is low and spillovers are strong. We also show that if firms can only make two types of binding contracts with shareholders, it is a dominant strategy for each firm to choose the delegation contract