In Research for academia, Work in progress

We present a theory of price and quality decisions by managers who are self-serving. In the theory, firms emphasize the price or quality of their products, but not both. Accounting for this, managers exploit any uncertainty about the cause of market outcomes to credit positive results to the dominant, “strategic” factor and blame negative results on the other. The problem with biased explanations, however, is that they prompt biased decisions. The present study reports experimental evidence that support this argument and develops a model to understand the impact of the bias on firm performance. Counter to intuition, we find that firms in a competitive setting actually profit from the self-serving nature of their managers.