| Abstract: | We study a firm in which the marginal productivity of agents'effort increases with the effort of others. We show that thepresence of an agent who overestimates his marginal productivitymay make all agents better off, including the biased agent himself.This Pareto improvement is obtained even when compensation contractsare set endogenously to maximize firm value. We show that thepresence of a leader improves coordination, but self-perceptionbiases can never be Pareto-improving when they affect the leader.Self-perception biases are also shown to affect job assignmentswithin firms and the likelihood and value of mergers. |
