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In a team formation model with endogenous team size, we show that overconfidence may dominate rationality by increasing agents’ individual payoffs in teams. If team members are overconfident in their own ability, effort levels increase and the free rider problem is partially resolved. Because each member believes himself to be more skilled than the other members, agents prefer larger-sized teams only if complementarities are sufficiently strong. From the perspective of individual welfare, overconfidence partially undermines the efficient formation of teams. Although team members can benefit from their overconfidence only if complementarities exist, team formation can even be advantageous if members’ inputs are substitutes as it prevents agents from overinvesting in effort. We consider different extensions, including asymmetric agents, repeated interactions and the roles of monitoring and budget breaking as possible remedies to free riding.

This paper revisits the debate about the appropriate differential equation that governs the evolution of knowledge in models of endogenous growth. We argue that the assessment of the appropriateness of an equation of motion should not only be based on its implications for the future, but that it should also include its implications for the past. We maintain that the evolution of knowledge is plausible if it satisfies two asymptotic conditions: Looking forwards, infinite knowledge in finite time should be excluded, and looking backwards, knowledge should vanish towards the beginning of time (but not before). Our key results show that, generically, the behavior of the processes under scrutiny is either implausible in the past and plausible in the future, or vice versa, or implausible at both ends of the time line.