Abstract
This study explores whether market competition between firms owned and run by managers favors overconfident managers. We study this question in a simple duopoly setting with differentiated products and show that when there is complete information about the competitor’s type, overconfident managers enjoy a competitive edge when (1) either the firms compete by setting quantities and the products are imperfect substitutes; or (2) the firms compete by setting prices and the products are imperfect complements. However, further analysis reveals that evolutionary market selection forces will always favor a positive degree of managerial overconfidence. We also study the case of incomplete information about the competitor’s type under quantitiy competition and show that evolutionary forces may still favor overconfident managers if market selection is driven by relative rather than absolute profit performance.