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An Economic Analysis of the Peter and Dilbert Principles

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  • Joao Ricardo Faria

Abstract

The paper discusses how the Peter and Dilbert Principles can occur and what are the consequences for a profit maximizing firm. A competence frontier is constructed as a linear combination of the maximum levels of technical and social skills that are difficult to measure and evaluate. The Peter Principle holds when managers are chosen from workers that are in the competence frontier and the Dilbert Principle when they are below the competence frontier. It is shown that the profitability under the Dilbert Principle is less than under the Peter Principle. The introduction of new technologies is one form to avoid the Dilbert Principle.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp101.pdf
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Bibliographic Info

Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 101.

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Date of creation: 01 Jan 2000
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Handle: RePEc:uts:wpaper:101

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Keywords: personnel management; incentives; managers;

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References

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  1. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  2. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-48, June.
  3. Becker, Gary S & Murphy, Kevin M, 1992. "The Division of Labor, Coordination Costs, and Knowledge," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1137-60, November.
  4. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
  5. Lazear, Edward P, 1995. "A Jobs-Based Analysis of Labor Markets," American Economic Review, American Economic Association, vol. 85(2), pages 260-65, May.
  6. 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.
  7. Dominique Demougin & Aloysius Siow, 1992. "Careers in Ongoing Hierarchies," Cahiers de recherche CREFE / CREFE Working Papers 5, CREFE, Université du Québec à Montréal.
  8. Faria, Joao Ricardo, 1998. "The Economics of Witchcraft and the Big Eye Effect," Kyklos, Wiley Blackwell, vol. 51(4), pages 537-46.
  9. Burgess, Simon & Rees, Hedley, 1997. "Transient Jobs and Lifetime Jobs: Dualism in the British Labour Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 309-28, August.
  10. Robert E. Hall, 1984. "The Importance of Lifetime Jobs in the U.S. Economy," NBER Working Papers 0560, National Bureau of Economic Research, Inc.
  11. Faria, Joao Ricardo, 2000. "Supervision and effort in an intertemporal efficiency wage model: the role of the Solow condition," Economics Letters, Elsevier, vol. 67(1), pages 93-98, April.
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Citations

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Cited by:
  1. Lazear, Edward, 2003. "The Peter Principle: A Theory of Decline," IZA Discussion Papers 759, Institute for the Study of Labor (IZA).
  2. Ulf Axelson & Philip Bond, 2011. "Investment banking careers: An equilibrium theory of overpaid jobs," FMG Discussion Papers dp690, Financial Markets Group.
  3. Stefanie Brilon, 2010. "Job Assignment with Multivariate Skills," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_25, Max Planck Institute for Research on Collective Goods.
  4. Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer, vol. 30(2), pages 195-221, February.
  5. 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.
  6. 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.
  7. Anja Schöttner & Veikko Thiele, 2010. "Promotion Tournaments and Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 699-731, 09.
  8. Alexander K. Koch & Julia Nafziger, 2012. "Job Assignments under Moral Hazard: The Peter Principle Revisited," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(4), pages 1029-1059, December.
  9. Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
  10. Gavilan, Angel, 2012. "Wage inequality, segregation by skill and the price of capital in an assignment model," European Economic Review, Elsevier, vol. 56(1), pages 116-137.
  11. James Ang & Rebel Cole & Daniel Lawson, 2010. "The Role of Owner in Capital Structure Decisions: An Analysis of Single-Owner Corporations," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 1-36, Fall.

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