The Peter Principle: Promotions and Declining Productivity

30 Pages Posted: 26 Jan 2001 Last revised: 13 Feb 2022

See all articles by Edward P. Lazear

Edward P. Lazear

Stanford Graduate School of Business; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: January 2001

Abstract

Many have observed that individuals perform worse after having received a promotion. The most famous statement of the idea is the Peter Principle, which states that people are promoted to their level of incompetence. There are a number of possible explanations. Two are explored. The most traditional is that the prospect of promotion provides incentives which vanish after the promotion has been granted; thus, tenured faculty slack off. Another is that output as a statistical matter is expected to fall. Being promoted is evidence that a standard has been met. Regression to the mean implies that future productivity will decline on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Both explanations are analyzed. The statistical point always holds; the slacking off story holds only under certain compensation structures.

Suggested Citation

Lazear, Edward P., The Peter Principle: Promotions and Declining Productivity (January 2001). NBER Working Paper No. w8094, Available at SSRN: https://ssrn.com/abstract=257833

Edward P. Lazear (Contact Author)

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