Confidence and Organizations

Abstract

In many environments, professionals have miscalibrated beliefs about their skills and knowledge, which potentially compromises the quality of their work. Why might a firm be better off hiring an individual known to be over- or under-confident? In this paper, I argue that such biases can alleviate agency frictions. I present a model in which an agent uses his private information to make a choice on behalf of a principal. Players differ in their preferred action in a given state of the world. In this setting, I consider what I call the belief design problem: how would the principal like the agent to interpret his private information? I provide conditions under which the solution to this problem can be interpreted as the principal preferring a rational, an under-confident, or an over-confident agent. Rationality is strictly preferred by the principal if and only if the expected difference in the players' preferred actions does not vary with the signal realization.