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Promotion dynamics the Peter Principle: Incumbents vs. external hires

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  • Acosta, Pablo

Abstract

The "Peter Principle" (Peter and Hull, 1969; Fairburn and Malcomson, 2001; Lazear, 2004) suggests that individuals are "promoted to their level of incompetence". A corollary of the "Peter Principle" prediction is that external hires should have an advantage when competing with incumbents for a higher position. Using five years of personnel records from a single large U.S. corporation, this paper contributes to the literature on internal labor markets and intra-firm job mobility by testing this prediction for career advancement. Results support the idea of differences in promotion dynamics among incumbents and external hires, since past career advancement within the firm result in a lower probability of subsequent promotion, even after controlling for workers' heterogeneity and tenure on the current job. The advantage for external hires does not hold once other job changes (lateral transfers, task reorganizations) are considered, highlighting that promotions are a very different job placement mechanism than transfers. Overall, the evidence points out towards declining performance following promotion, as opposed to alternative competing hypothesis of probation placement or "handicapping" external candidates.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 17 (2010)
Issue (Month): 6 (December)
Pages: 975-986

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Handle: RePEc:eee:labeco:v:17:y:2010:i:6:p:975-986

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Web page: http://www.elsevier.com/locate/labeco

Related research

Keywords: Promotions Internal-external hires Job mobility;

References

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  1. Fairburn, J.A. & Malcomson, J.M., 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 9926, University of Oxford, Department of Economics.
  2. Pierre-Andre Chiappori & Bernard Salanie & Julie Valentin, 1999. "Early Starters versus Late Beginners," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 731-760, August.
  3. Christian Belzil & Michael Bognanno, 2004. "The Promotion Dynamics of American Executives," Post-Print halshs-00180126, HAL.
  4. Chan, William, 1996. "External Recruitment versus Internal Promotion," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 555-70, October.
  5. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 175-209, April.
  6. Medoff, James L & Abraham, Katharine G, 1980. "Experience, Performance, and Earnings," The Quarterly Journal of Economics, MIT Press, vol. 95(4), pages 703-36, December.
  7. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
  8. William Chan, 2006. "External Recruitment and Intrafirm Mobility," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 169-184, January.
  9. Ariga, Kenn & Brunello, Giorgio & Ohkusa, Yasushi, 1997. "Fast Track: Is it in the Genes? The Promotion Policy of a Large Japanese Firm," CEPR Discussion Papers 1622, C.E.P.R. Discussion Papers.
  10. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
  11. Agrawal, Anup & Knoeber, Charles R. & Tsoulouhas, Theofanis, 2006. "Are outsiders handicapped in CEO successions?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 619-644, June.
  12. Michael Gibbs & Wallace Hendricks, 2004. "Do formal salary systems really matter?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
  13. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  14. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  15. Edward P. Lazear, 2004. "The Peter Principle: A Theory of Decline," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S141-S163, February.
  16. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
  17. James J. Heckman, 1981. "Heterogeneity and State Dependence," NBER Chapters, in: Studies in Labor Markets, pages 91-140 National Bureau of Economic Research, Inc.
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Cited by:
  1. Fetta, A.G. & Harper, P.R. & Knight, V.A. & Vieira, I.T. & Williams, J.E., 2012. "On the Peter Principle: An agent based investigation into the consequential effects of social networks and behavioural factors," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(9), pages 2898-2910.

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