Western parents often give children overly positive, inflated praise. One perspective holds that inflated praise sets unattainable standards for children, eventually lowering children's self‐esteem (self‐deflation hypothesis). Another perspective holds that children internalize inflated praise to form narcissistic self‐views (self‐inflation hypothesis). These perspectives were tested in an observational‐longitudinal study (120 parent–child dyads from the Netherlands) in late childhood (ages 7–11), when narcissism and self‐esteem first emerge. Supporting the self‐deflation hypothesis, parents’ inflated praise predicted lower self‐esteem in children. Partly supporting the self‐inflation hypothesis, parents’ inflated praise predicted higher narcissism—but only in children with high self‐esteem. Noninflated praise predicted neither self‐esteem nor narcissism. Thus, inflated praise may foster the self‐views it seeks to prevent.