Delusions of Grandeur and Their Benefits (and Hazards)

Abstract

We study a population-wide tournament in which agents, who care both about their absolute and relative wealth, experiment by searching over correlated objects. We explore the role of the agents' beliefs about the environment; namely, the stochastic processes corresponding to their experimentation. We find that although optimism leads to higher output, it also produces greater inequality. We connect these observations with empirical evidence suggesting a positive relationship between inequality and entrepreneurship.