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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.

Suggested Citation

  • 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.
  • Handle: RePEc:uts:wpaper:101
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp101.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Lazear, Edward, 2003. "The Peter Principle: A Theory of Decline," IZA Discussion Papers 759, Institute for the Study of Labor (IZA).
    3. Theofanis Tsoulouhas & Charles Knoeber & Anup Agrawal, 2007. "Contests to become CEO: incentives, selection and handicaps," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 195-221, February.
    4. 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.
    5. Stefanie Brilon, 2010. "Job Assignment with Multivariate Skills," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_25, Max Planck Institute for Research on Collective Goods.
    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 1-4.
    7. Ulf Axelson & Philip Bond, 2011. "Investment banking careers: An equilibrium theory of overpaid jobs," FMG Discussion Papers dp690, Financial Markets Group.
    8. Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
    9. 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.
    10. 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.
    11. 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.

    More about this item

    Keywords

    personnel management; incentives; managers;

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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