Abstract
We explore whether competition between firms owned and run by entrepreneurs favors overconfident entrepreneurs. We study this question in a variety of settings, all based on Cournot duopoly in the product market. In the basic model, entrepreneurs choose their own firm’s output and may have more or less optimistic beliefs about their own firm’s (random) production costs. We study both the case of complete and incomplete information about the competitor’s type. We also analyze a model with endogenous costs in the complete-information setting in which entrepreneurs make efforts to reduce their firm’s production costs. For each of the model versions, we show that, if market selection is driven by firms’ absolute and/or relative profit performance, somewhat overconfident entrepreneurs will be selected for, and that this tendency is stronger the more emphasis is placed on relative performance.