A Bright Side of Peter-Principle Promotions

Promotion to managerial roles is often strongly based on workers' performance in their current roles rather than on their managerial aptitude—the Peter principle. This paper provides a novel rationale for this apparent mismatch when promotions serve no incentive role. We model workers who care about meeting managers' expectations, and managers with interpersonal projection bias: when forming expectations about workers' performance, they give excessive weight to their own past performance. We show that organizations benefit from promoting high-performing workers to managers even when they have low managerial aptitude, because such managers hold high expectations, inducing greater effort.