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Keeping Up With the Joneses: Economic Impacts of Overconfidence in Micro-Entrepreneurs

Project Description

Julia Seither

Universidad del Rosario, University of Chicago | UCEMA Joint Initiative for Latin American Experimental Economics (JILAEE) and NOVAFRICA

ISSN 2183-0843
Working Paper No 2108
April 2021

Abstract:

This paper investigates the effects of incorrect beliefs over relative firm performance on micro-firm outputs through a randomized field experiment in Mozambique. At baseline, 76% of firm owners in the bottom of the distribution are overconfident about their firm’s performance. The estimates reveal that correcting these beliefs through a simple, easily scalable information experiment closes the performance gap between treated firms in the bottom of the distribution at baseline and average and top firms by almost 43%. Moreover, the treatment increases the time a firm owner allocates to her business, improves strategic cooperation with the most important business partners, and affects the pricing strategy of treated firm owners. My results suggest that incorrect beliefs about relative performance are a binding constraint to firm growth that have large implications for managerial behaviour and firm outcomes.

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