Hiring Dreamers

Abstract: Why would firms hire dreamers, namely managers who overestimate the impact of their effort on product quality, given that this may lead to suboptimal choices? Is this related to the degree of product market competition? We answer these questions by studying the performance of dreamers under several market structures. A monopolistic firm always benefits from the dreamer's mistaken beliefs about the impact of his effort on quality by offering him a contract that entails a high bonus and a low fixed wage. Firms also hire dreamers in the presence of competition but they do not benefit from their availability. Since in equilibrium all firms hire dreamers to stay competitive in the market, total revenues are not affected by the managers' overoptimism, while monetary compensation positively depends on it. We also examine an environment in which there is competition for dreamers, i.e. there are more firms than overoptimistic managers, and firms have asymmetric production costs. When their hiring decisions are made simultaneously, efficient firms reinforce the existing competitive advantage by hiring dreamers. Conversely, under sequential offers, inefficient firms hire dreamers to catch up with the efficient firms.