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The Peter Principle: Promotions and Declining Productivity

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Author Info
Edward P. Lazear
Abstract

Many have observed that individuals perform worse after having received a promotion. The most famous statement of the idea is the Peter Principle, which states that people are promoted to their level of incompetence. There are a number of possible explanations. Two are explored. The most traditional is that the prospect of promotion provides incentives which vanish after the promotion has been granted; thus, tenured faculty slack off. Another is that output as a statistical matter is expected to fall. Being promoted is evidence that a standard has been met. Regression to the mean implies that future productivity will decline on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Both explanations are analyzed. The statistical point always holds; the slacking off story holds only under certain compensation structures.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8094.

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Date of creation: Jan 2001
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Handle: RePEc:nbr:nberwo:8094

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Find related papers by JEL classification:
J00 - Labor and Demographic Economics - - General - - - General
J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies

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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.
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  2. Joao Ricardo Faria, 2000. "An Economic Analysis of the Peter and Dilbert Principles," Working Paper Series 101, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  3. Anderson, Ralph E. & Dubinsky, Alan J. & Mehta, Rajiv, 1999. "Sales managers: Marketing's best example of the peter principle?," Business Horizons, Elsevier, vol. 42(1), pages 19-26. [Downloadable!] (restricted)
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  1. Robert Gibbons & Michael Waldman, 2003. "Enriching a Theory of Wage and Promotion Dynamics Inside Firms," NBER Working Papers 9849, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Stéphanie Lluis, 2001. "Wage Policy of Firms: An Empirical Investigation," CIRANO Working Papers 2001s-47, CIRANO. [Downloadable!]
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  3. Van den Steen, Eric, 2002. "Skill or Luck? Biases of Rational Agents," Working papers 4255-02, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  4. Stephanie Lluis, . "The Role of Comparative Advantage and Learning in Wage Dynamics and Intra-Firm Mobility: Evidence from Germany," Working Papers 0103, Industrial Relations Center, University of Minnesota (Twin Cities Campus). [Downloadable!]
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