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Worker Discretion and Misallocation of Talent within Firms


  • Hans K. Hvide

    (Department of Finance, Norwegian School of Economics and Business)

  • Todd Kaplan

    (Department of Economics, University of Exeter)


We develop a theory of worker discretion over task choice within a firm. Increasing the workers’ discretion has a trade-off between the gains from workers using private information about their abilities, and the costs from adverse selection within the firm due to workers herding into prestigious tasks. The theory leads to the result that, in line with the Peter Principle, misallocation of talent within firms takes the form of too many workers undertaking tasks with a high return to ability. Moreover we find that the degree of misallocation of talent is decreasing in the degree of discretion given to workers.

Suggested Citation

  • Hans K. Hvide & Todd Kaplan, 2001. "Worker Discretion and Misallocation of Talent within Firms," Discussion Papers 0108, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:0108

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    1. The economic cost of the X Factor
      by chris dillow in Stumbling and Mumbling on 2011-11-23 20:33:46

    More about this item


    Authority; Bureaucracies; Career Concerns; Discretion; Organizational Design; Misallocation; Peter Principle; Principal-Agent Theory; Sun Hydraulics; Wage Dynamics;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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