The Effects of Biased Self-Perceptions in Teams∗

We model a team in which the marginal productivity of a player increases with the effort of other players on the team. Because the effort of each player is not observable to any other player, the performance of the team is negatively affected by a free-rider problem and by a lack of effort coordination across players. In this context, a player who mistakenly overestimates her own marginal productivity works harder, thereby increasing the marginal productivity of her teammates who then work harder as well. This not only enhances team performance but may also create a Pareto improvement at the individual level. Indeed, although the biased player overworks, she benefits from the positive externality that other players working harder generates. Interestingly, the benefits of self-perception biases may be long-lived even if players learn from team performance, as the biased player attributes the team’s success to her own ability, and not to the better coordination of the team. The presence of a team leader improves coordination and team value, but self-perception biases can never be Pareto-improving when they affect the leader. Because self-perception biases naturally make players work harder, monitoring, even when it is costless, may hurt the team by causing an overinvestment in effort. JEL classification: D21, D62, L22, J24.