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Optimal Team Size and Overconfidence

Optimal Team Size and Overconfidence 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Group Decision and Negotiation Springer Journals

Optimal Team Size and Overconfidence

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Publisher
Springer Journals
Copyright
Copyright © 2018 by Springer Science+Business Media B.V., part of Springer Nature
Subject
Business and Management; Operations Research/Decision Theory; Social Sciences, general
ISSN
0926-2644
eISSN
1572-9907
DOI
10.1007/s10726-018-9575-9
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Group Decision and Negotiation – Springer Journals

Published: May 31, 2018

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