The available evidence from numerous studies in psychology suggests that overconfidence is a more important phenomenon in North America than in Japan. Relatedly, North Americans appear to view high self-esteem more positively than Japanese. The pattern is reversed when it comes to shame, a social emotion which appears to play a more important role among Japanese than North Americans. We develop an economic model that endogenizes these observed differences. A crucial tradeoff arises in the model between the benefits of encouraging self-improvement and the benefits of promoting initiative and new investments. In this context, self-esteem maintenance (self-enhancement) and high sensitivity to shame emerge as substitute mechanisms to induce efficient effort and investment decisions, generating a \North American" equilibrium with overconfidence and low sensitivity to shame, and a \Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the key equilibrium costs as well as the benefits of reliance on each mechanism, and the implications for welfare.
Overconfidence; shame; cultural transmission;
- D82: Asymmetric and Private Information • Mechanism Design
- D83: Search • Learning • Information and Knowledge • Communication • Belief
- Z13: Economic Sociology • Economic Anthropology • Social and Economic Stratification
TSE Working Paper, n. 10-191, November 2011, revised December 2013