Selecting Overconfidence: Founder Bias as Delegated Commitment in Entrepreneurial Teams

Why do rational co‐founders repeatedly select overconfident partners? We develop a formal model in which founder overconfidence carries both a benefit and a cost for the venture team. The benefit operates through effort: a founder who overestimates project value works harder, and because efforts are strategic complements it induces higher effort from a rational co‐founder, partially solving the team moral hazard problem. The cost operates through decisions: overconfidence distorts resource allocation and delays exit from failing courses of action. The co‐founder's partner‐selection problem trades off these forces, and its solution constitutes a form of delegated commitment: like an owner who commits to aggressive competition by hiring a manager with distorted incentives, the co‐founder commits the team to a high‐effort equilibrium by partnering with a founder whose beliefs make high effort a best response. We establish five results: (1) Both agents' efforts strictly increase with founder bias. (2) The co‐founder's payoff is uniquely maximized at a strictly positive, interior bias level, so perfectly rational founders are suboptimal partners, and this preference survives when candidate founders vary jointly in quality and bias and when equity is negotiated. (3) Total team surplus peaks at a lower bias level than the co‐founder's private optimum, because the co‐founder externalizes both the founder's overwork and part of the distortion cost. (4) Optimal bias increases with project quality: quality and founder confidence are complements in team production. (5) Welfare gains from optimal bias selection are superlinear in project quality, and we show that this superlinearity is generated entirely by effort complementarity: absent complementarity, percentage gains are independent of quality. These results reframe overconfidence from an individual‐level cognitive error to a costly but strategically selected feature of entrepreneurial team formation, with implications for co‐founder selection, venture capital assessment, and the design of entrepreneurial teams.