Abstract (EN)

Behavioral biases and agency frictions are essential to the financing of new ventures. This paper develops a moral hazard model with subjective beliefs that captures distinct forms of behavioral biases and identifies conditions under which an entrepreneur will experience stigma of failure. While overconfidence protects entrepreneurs from the direct consequences of being stigmatized, optimism alone should not. Hence, when optimistic entrepreneurs are mistaken for overconfident ones, investors are more likely to finance negative NPV projects. Such suboptimal decisions also appear when investors are optimistic, in which case entrepreneurial overconfidence fosters the excess financing of negative NPV projects. On the contrary, when investors are pessimistic, entrepreneurial overconfidence reduces the underfinancing ofgood projects. I discuss macroeconomic implications and provide empirical predictions.