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The Peter Principle: Promotions and Declining Productivity

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  • 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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Bibliographic Info

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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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:8094

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  1. 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.
  2. Fairburn, J.A. & Malcomson, J.M., 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 9926, University of Oxford, Department of Economics.
  3. 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.
  4. Joao Ricardo Faria, 2000. "An Economic Analysis of the Peter and Dilbert Principles," Working Paper Series 101, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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Cited by:
  1. Hans K. Hvide & Todd Kaplan, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Microeconomics 0311001, EconWPA.
  2. Hvide, Hans K & Kaplan, Todd, 2003. "Delegated Job Design," CEPR Discussion Papers 3907, C.E.P.R. Discussion Papers.
  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.
  4. LLUIS, Stéphanie, 2001. "Wage Policy of Firms: an Empirical Investigation," Cahiers de recherche 2001-18, Universite de Montreal, Departement de sciences economiques.
  5. 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.
  6. Stéphanie Lluis, 2002. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C2-3, International Conferences on Panel Data.
  7. Pawel Sobkowicz, 2010. "Dilbert-Peter Model of Organization Effectiveness: Computer Simulations," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 13(4), pages 4.
  8. Ariga, Kenn, 2006. "Horizontal transfer, vertical promotion, and evolution of firm organization," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 20-49, March.

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