TITLE:
Endogenous Information Acquisition for an Overconfident Retailer
AUTHORS:
Jialu Li, Meiying Yang
KEYWORDS:
Overconfidence, Information Acquisition, Supply Chain Coordination
JOURNAL NAME:
Modern Economy,
Vol.9 No.3,
March
15,
2018
ABSTRACT: Overconfidence has been proven to be “one of the
most consistent, powerful and wide spread cognitive biases”. In this paper, we
develop a model in which a supplier selling to an overconfident retailer
invests in acquiring market information. Overconfidence causes the retailer to overestimate
the precision of his private information as well as his capacity to acquire
information. Our work shows that overconfidence hurts the retailer’s profits,
and may even eliminate the benefits of information. Instead, the supplier can
benefit from the retailer’s overconfidence. We demonstrate that this bias with
an endogenous information-acquisition effort can coordinate the supply chain to
achieve its first-best benchmark.