CEO bias and the degree of industry competition

Recent theoretical work rationalizes evidence that many chief executive officers (CEOs) have biased levels of confidence. The main limitation of these studies is that they consider a limited number of modes of competition. The model in this paper allows the degree of competition to include the full spectrum of possibilities from perfect competition to perfect collusion. The results show that boards of directors (or owners) can benefit from hiring overconfident CEOs in a strategic setting when there is less competition and less product differentiation. The relatively large parameter space that supports this conclusion is consistent with the empirical evidence that many CEOs are overconfident. In addition, the relatively small parameter space that supports underconfidence is consistent with the fact that some CEOs are relatively cautious. From a policy perspective, the model suggests that society may be better off if boards of directors focus on the interests of a broad range of stakeholders, not just shareholders.