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Job Assignments under Moral Hazard: The Peter Principle Revisited

Author

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  • Koch, Alexander K.

    (Aarhus University)

  • Nafziger, Julia

    (Aarhus University)

Abstract
The Peter Principle captures two stylized facts about hierarchies: first, promotions often place employees into jobs for which they are less well suited than for that previously held. Second, demotions are extremely rare. Why do organizations not correct ‘wrong’ promotion decision? This paper shows in a complete contracting setting that a simple trade-off between incentive provision and efficient job assignment may make it optimal to promote some employees to a job at which they produce less than they would at the previous level.

Suggested Citation

  • Koch, Alexander K. & Nafziger, Julia, 2007. "Job Assignments under Moral Hazard: The Peter Principle Revisited," IZA Discussion Papers 2973, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2973
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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. Nafziger, Julia, 2008. "Job Assignments, Intrinsic Motivation and Explicit Incentives," Bonn Econ Discussion Papers 5/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Staccioli, Jacopo & Napoletano, Mauro, 2021. "An agent-based model of intra-day financial markets dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 331-348.
    4. Cirillo, Valeria & Rinaldini, Matteo & Staccioli, Jacopo & Virgillito, Maria Enrica, 2018. "Workers’ awareness context in Italian 4.0 factories," GLO Discussion Paper Series 240, Global Labor Organization (GLO).
    5. Michael Mueller, 2016. "Does Sporting Activity Foster Career Advancement?," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 2(4), pages 285-298.
    6. David Dickinson & Marie Claire Villeval, 2007. "The Peter Principle: An Experiment," Post-Print halshs-00201225, HAL.
    7. Müller, Michael, 2016. "Fördert sportliche Aktivität den beruflichen Aufstieg?," Discussion Papers of the Institute for Organisational Economics 02/2016, University of Münster, Institute for Organisational Economics.
    8. Matthias Fahn & Nicolas Klein, 2023. "Non-Common Priors, Incentives, and Promotions: The Role of Learning," Economics working papers 2023-06, Department of Economics, Johannes Kepler University Linz, Austria.
    9. João Ricardo Faria & Franklin G. Mixon, 2020. "The Peter and Dilbert Principles applied to academe," Economics of Governance, Springer, vol. 21(2), pages 115-132, June.
    10. ASUYAMA Yoko & OWAN Hideo, 2024. "People Management Skills, Senior Leadership Skills and the Peter Principle," Discussion papers 24037, Research Institute of Economy, Trade and Industry (RIETI).
    11. Brahmana, Rayenda Khresna & Setiawan, Doddy & Hooy, Chee Wooi, 2014. "Diversification strategy, Ownership Structure, and Firm Value: a study of public‐listed firms in Indonesia," MPRA Paper 64607, University Library of Munich, Germany.
    12. 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.
    13. Brilon, Stefanie, 2015. "Job assignment with multivariate skills and the Peter Principle," Labour Economics, Elsevier, vol. 32(C), pages 112-121.
    14. Valeria Cirillo & Matteo Rinaldini & Jacopo Staccioli & Maria Enrica Virgillito, 2018. "Workers' intervention authority in Italian 4.0 factories: autonomy and discretion," LEM Papers Series 2018/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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    More about this item

    Keywords

    moral hazard; Peter Principle; job assignments; information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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