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Promotions and the Peter Principle

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  • Alan Benson
  • Danielle Li
  • Kelly Shue

Abstract

The best worker is not always the best candidate for manager. In these cases, do firms promote the best potential manager or the best worker in her current job? Using microdata on the performance of sales workers at 214 firms, we find evidence consistent with the “Peter Principle,” which predicts that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance. We estimate that the costs of promoting workers with lower managerial potential are high, suggesting either that firms are making inefficient promotion decisions or that the benefits of promotion-based incentives are great enough to justify the costs of managerial mismatch.

Suggested Citation

  • Alan Benson & Danielle Li & Kelly Shue, 2018. "Promotions and the Peter Principle," NBER Working Papers 24343, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24343
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    Cited by:

    1. Alan Benson & Ben A. Rissing, 2020. "Strength from Within: Internal Mobility and the Retention of High Performers," Organization Science, INFORMS, vol. 31(6), pages 1475-1496, November.
    2. Kevin Devereux, 2021. "Returns to Teamwork and Professional Networks: Evidence from Economic Research," Working Papers 202101, School of Economics, University College Dublin.
    3. Adhvaryu, Achyuta & Bassi, Vittorio & Nyshadham, Anant & Tamayo, Jorge, 2020. "No Line Left Behind: Assortative Matching Inside the Firm," CEPR Discussion Papers 14554, C.E.P.R. Discussion Papers.
    4. Fabo, Brian & Jancokova, Martina & Kempf, Elisabeth & Pástor, Lubos, 2020. "Fifty Shades of QE: Conflicts of Interest in Economic Research," CEPR Discussion Papers 15449, C.E.P.R. Discussion Papers.
    5. Devereux, Kevin, 2018. "Identifying the value of teamwork: Application to professional tennis," CLEF Working Paper Series 14, Canadian Labour Economics Forum (CLEF), University of Waterloo.
    6. Mario Bossler & Philipp Grunau, 2020. "Asymmetric information in external versus internal promotions," Empirical Economics, Springer, vol. 59(6), pages 2977-2998, December.
    7. Danielle Li & Lindsey R. Raymond & Peter Bergman, 2020. "Hiring as Exploration," NBER Working Papers 27736, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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