Events at CERGE-EI

Dana Sisak, Ph.D.

Erasmus University Rotterdam, The Netherlands

Authors: Philipp Denter, John Morgan, and Dana Sisak

Abstract: We study a situation where a newbie with potentially unknown talent enters into competition with an established competitor of known talent. Assuming the newbie is aware of his talent, we first study his incentive to show off and reveal his type through costly signaling to his competitor. We find that whether he reveals his type in equilibrium, depends on his as well as the incumbent's talent. When the incumbent is relatively weak, strong newbie types show off in equilibrium. Otherwise, showing off does not occur. We then study whether the incumbent is hurt by the newbie's showing off behavior. Interestingly, we find that both competitors benefit from showing off if it happens, to the detriment of the principal. Thus, a principal interested in maximizing aggregate effort prefers a firm culture where showing off is not possible. We also show that this result may be reversed when the newbie exhibits overconfidence.

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