Overconfidence, Relative Performance Evaluation, and Managerial Delegation Under Quantity Competition: A Reversal Result

ABSTRACT We revisit the managerial delegation game by considering the optimal weight placed on the rival's profit under relative performance evaluation with an overconfident manager. In economic studies, the effect of biased managers is investigated in several situations with the delegation game. In contrast to the classical studies where owners set a negative weight on rivals' profit under quantity competition, we demonstrate that the owner who hires an overconfident manager may set a positive weight to avoid excessive supply under specific conditions. Additionally, overconfidence improves consumer surplus and social welfare in specific economic environments by increasing the supplied quantities. Our results suggest the bright and dark sides of overconfident managers with relative performance evaluations.