IDEAS home Printed from https://ideas.repec.org/a/bla/jemstr/v21y2012i4p1029-1059.html
   My bibliography  Save this article

Job Assignments under Moral Hazard: The Peter Principle Revisited

Author

Listed:
  • Alexander K. Koch
  • Julia Nafziger

Abstract

The Peter Principle captures two stylized facts about hierarchies: first, promotions often place employees into jobs for which they are less well suited than for that previously held. Second, demotions are extremely rare. Why do organizations not correct ‘wrong’ promotion decision? This paper shows in a complete contracting setting that a simple trade-off between incentive provision and efficient job assignment may make it optimal to promote some employees to a job at which they produce less than they would at the previous level.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jemstr:v:21:y:2012:i:4:p:1029-1059
    DOI: j.1530-9134.2012.00347.x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1530-9134.2012.00347.x
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Junichiro Ishida, 2006. "Optimal Promotion Policies with the Looking-Glass Effect," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 857-878, October.
    3. Dan Bernhardt, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 315-339.
    4. Dominique Demougin & Claude Fluet, 1998. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 622-622, December.
    5. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
    6. Margaret A. Meyer, 1991. "Learning from Coarse Information: Biased Contests and Career Profiles," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 15-41.
    7. 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.
    8. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    9. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    10. Jaime Ortega, 2003. "Power in the Firm and Managerial Career Concerns," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 1-29, March.
    11. Treble, John & van Gameren, Edwin & Bridges, Sarah & Barmby, Tim, 2001. "The internal economics of the firm: further evidence from personnel data," Labour Economics, Elsevier, vol. 8(5), pages 531-552, December.
    12. MacLeod, W Bentley & Malcomson, James M, 1988. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 832-854, August.
    13. Eric Maskin & Yingyi Qian & Chenggang Xu, 2000. "Incentives, Information, and Organizational Form," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 359-378.
    14. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
    15. James A. Fairburn & James M. Malcomson, 2001. "Performance, Promotion, and the Peter Principle," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 45-66.
    16. Guido Friebel & Michael Raith, 2004. "Abuse of Authority and Hierarchical Communication," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 224-244, Summer.
    17. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 453-472, June.
    18. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-461, June.
    19. Illoong Kwon, 2006. "Incentives, wages, and promotions: theory and evidence," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 100-120, March.
    20. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    21. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    22. Emmanuelle Auriol & Régis Renault, 2008. "Status and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 305-326.
    23. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
    24. Brendan O'Flaherty & Aloysius Siow, 1992. "On the Job Screening, up or out Rules, and Firm Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 346-368, May.
    25. 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.
    26. Michael Gibbs & Wallace Hendricks, 2004. "Do Formal Salary Systems Really Matter?," ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
    27. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
    28. Ricart i Costa, Joan E, 1988. "Managerial Task Assignment and Promotions," Econometrica, Econometric Society, vol. 56(2), pages 449-466, March.
    29. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1125-1156.
    30. Julia Nafziger, 2008. "Job Assignments, Intrinsic Motivation and Explicit Incentives," Bonn Econ Discussion Papers bgse5_2008, University of Bonn, Germany.
    31. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
    32. Canice Prendergast, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 523-534.
    33. Edward P. Lazear, 2004. "The Peter Principle: A Theory of Decline," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 141-163, February.
    34. Carrillo, Juan D., 2003. "Job assignments as a screening device," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 881-905, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Dickinson & Marie Claire Villeval, 2007. "The Peter Principle: An Experiment," Post-Print halshs-00175426, HAL.
    2. Anja Schöttner & Veikko Thiele, 2010. "Promotion Tournaments and Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 699-731, September.
    3. 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 1-4.
    4. Brilon, Stefanie, 2015. "Job assignment with multivariate skills and the Peter Principle," Labour Economics, Elsevier, vol. 32(C), pages 112-121.
    5. Michael Mueller, 2016. "Does Sporting Activity Foster Career Advancement?," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 2(4), pages 285-298.
    6. Julia Nafziger, 2008. "Job Assignments, Intrinsic Motivation and Explicit Incentives," Bonn Econ Discussion Papers bgse5_2008, University of Bonn, Germany.
    7. Müller, Michael, 2016. "Fördert sportliche Aktivität den beruflichen Aufstieg?," Discussion Papers of the Institute for Organisational Economics 02/2016, University of Münster, Institute for Organisational Economics.
    8. Brahmana, Rayenda Khresna & Setiawan, Doddy & Hooy, Chee Wooi, 2014. "Diversification strategy, Ownership Structure, and Firm Value: a study of public‐listed firms in Indonesia," MPRA Paper 64607, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jemstr:v:21:y:2012:i:4:p:1029-1059. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.kellogg.northwestern.edu/research/journals/JEMS/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.