Overconfidence, Fairness, and Team Performance

Behavioral economists are increasingly debating the desirability of overconfidence for individual and social welfare. For example, in Gervais and Goldstein's (2003) model of teamwork, a two-player team consisting of one overconfident and one rational agent outperforms a team consisting of two rational agents, since overconfidence enhances effort levels. We contribute to the debate by allowing the partners to negotiate over their share of the expected profits prior to exerting effort (in contrast to Gervais and Goldstein, who assume that the team-members' profit allocation is exogenously given as a 50-50 split). Now, the effect of overconfidence on team performance is ambiguous. Although overconfidence enhances effort levels, it also affects the negotiations in favor of the overconfident agent, reducing the rational agent's effort incentives. This problem may be mitigated when we consider fairness in bargaining