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The Peter Principle: An Experiment

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Author Info
David L. Dickinson
Marie-Claire Villeval

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Abstract

The Peter Principle states that, after a promotion, the observed output of promoted employees tends to fall. Lazear (2004) models this principle as resulting from a regression to the mean of the transitory component of ability. Our experiment reproduces this model in the laboratory by means of various treatments in which we alter the variance of the transitory ability. We also compare the efficiency of an exogenous promotion standard with a treatment where subjects self-select their task. Our evidence confirms the Peter Principle when the variance of the transitory ability is large. In most cases, the efficiency of job allocation is higher when using a promotion rule than when employees are allowed to self-select their task. This is likely due to subjects’ bias regarding their transitory ability. Naïve thinking, more than optimism/pessimism bias, may explain why subjects do not distort their effort prior to promotion, contrary to Lazear’s (2004) prediction. Key Words: Promotion, Peter Principle, Sorting, Experiment

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Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 07-16.

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Date of creation: 2007
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Handle: RePEc:apl:wpaper:07-16

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Web page: http://www.business.appstate.edu/departments/economics/
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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M51 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Firm Employment Decisions; Promotions
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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  1. Alexander K. Koch & Julia Nafziger, 2007. "Job Assignments under Moral Hazard: The Peter Principle Revisited," IZA Discussion Papers 2973, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Eric Van den Steen, 2004. "Rational Overoptimism (and Other Biases)," American Economic Review, American Economic Association, vol. 94(4), pages 1141-1151, September. [Downloadable!]
  3. Bernhardt, Dan, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Blackwell Publishing, vol. 62(2), pages 315-39, April. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Meyer, Margaret A, 1991. "Learning from Coarse Information: Biased Contests and Career Profiles," Review of Economic Studies, Blackwell Publishing, vol. 58(1), pages 15-41, January. [Downloadable!] (restricted)
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This page was last updated on 2009-11-14.

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