Confidence management in contests

Abstract

AbstractAn incumbent employee competes against a new hire for bonuses or promotions. The incumbent's perception of the new hire's ability distribution is biased. This bias can result in overconfidence or underconfidence. We show that debiasing may be counterproductive in incentivizing efforts. We then explore whether a firm that values employees’ efforts should disclose an informative signal about the new hire's type and we characterize the conditions under which transparency or opacity is optimal for the firm. We further consider four extensions to the model. Our results contribute to the extensive discussion of confidence management and organizational transparency in firms.