Supply function competition with CEO bias

We investigate the motivation for a firm to hire a biased chief executive officer (CEO) under supply function competition. Previous work has found that in symmetric duopoly models such as Cournot and Bertrand, it is optimal for owners to hire overconfident CEOs. Recent literature has revealed, however, that many firms compete in supply functions. We develop a two-stage model in which firm owners first decide to hire CEOs who are overconfident, underconfident, or rationally confident in their estimation of supply or demand. The potentially biased CEOs then compete in supply functions. We find that, with demand bias, it is optimal to hire CEOs who underestimate demand. With the potential for supply bias, however, it is optimal to hire CEOs who are unbiased. Thus, an owner's decision depends on both the source of potential bias and the mode of competition.