The Effect of Foreign Competition on Forecasting Bias

This paper studies the effect of foreign competition on the extent of forecasting bias. I focus on two biases often described in the behavioral economics literature: overoptimism and excessive belief in trends. Using data from firm-level surveys in five African countries, I show that firms that do not face foreign competition generate forecasts of sales growth that have greater trend and optimism biases than firms that have foreign competitors. I further provide evidence that these erroneous forecasts have real effects on firms' inventory management. © 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.