Management Control Optimization under Managerial Overconfidence: A Principal–Agent Model of Business Development Decisions
DOI:
https://doi.org/10.55578/jdso.2611.012Keywords:
Management control optimization, Managerial overconfidence, Business development decisions, Incentive intensity, Monitoring intensityAbstract
Business development decisions require resource commitments under uncertain opportunity quality, giving managerial judgment a central role in investment evaluation. This study develops an agency model to examine how managerial overconfidence shapes optimal incentive intensity and monitoring intensity. A behavioral parameter captures the manager’s overestimation of opportunity value, while the board anticipates the investment response and selects both control instruments. Equilibrium analysis examines how biased beliefs, environmental uncertainty, effort costs, and monitoring costs influence control choices. Overconfidence raises perceived investment returns and increases managerial effort for given control choices. Comparative statics suggest that stronger bias reduces optimal incentive intensity and increases optimal monitoring intensity. Inflated expectations provide investment motivation and reduce the need for financial rewards. Monitoring reduces evaluation error losses outside the compensation measure. Numerical illustrations show lower optimal incentive shares and higher monitoring intensity as overconfidence increases. These findings connect managerial cognition with endogenous control design and clarify how behavioral and informational conditions shape business development decisions. The model distinguishes the motivational effects of overconfidence from evaluation losses outside compensation measures and characterizes the optimal control response to each effect.
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This study uses no external datasets. The article and supplementary materials provide the analytical derivations, code, and numerical results supporting the findings.
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