Misguided Effort

We experimentally study how miscalibrated prior beliefs about one's own ability affect effort provision through misguided inferences about returns to effort. We demonstrate that both overconfident and underconfident individuals draw misguided inferences about the returns to effort when observing initial labor market outcomes that are jointly determined by their own ability and external fundamentals. Crucially, we establish that misguided inferences lead to suboptimal future effort provision. These findings provide the first causal empirical support for a theorized effect of miscalibrated prior beliefs on economic actions that operates through misguided inferences about the economic environment.