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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. M. Antonella Mancino, Leonardo Fabio Morales, Diego F. Salazar, 2024. "Signaling Worker Quality in a Developing Country: Lessons from a Certification Program," LCERPA Working Papers bm0143, Laurier Centre for Economic Research and Policy Analysis.
    2. Marius Guenzel & Ulrike Malmendier, 2020. "Behavioral Corporate Finance: The Life Cycle of a CEO Career," NBER Working Papers 27635, National Bureau of Economic Research, Inc.
    3. 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.
    4. Kevin Devereux, 2021. "Returns to Teamwork and Professional Networks: Evidence from Economic Research," Working Papers 202101, School of Economics, University College Dublin.
    5. Bassi, Vittorio & Nyshadham, Anant & Tamayo, Jorge & Adhvaryu, Achyuta, 2020. "No Line Left Behind: Assortative Matching Inside the Firm," CEPR Discussion Papers 14554, C.E.P.R. Discussion Papers.
    6. Jasna Gačić & Stefan Milojević & Snežana Knežević & Miljan Adamović, 2023. "Financial Literacy of Managers in Serbian Health Care Organizations as a Path to Sustainability," Sustainability, MDPI, vol. 15(7), pages 1-26, April.
    7. Mario Bossler & Philipp Grunau, 2020. "Asymmetric information in external versus internal promotions," Empirical Economics, Springer, vol. 59(6), pages 2977-2998, December.
    8. Malmendier, Ulrike M. & Guenzel, Marius, 2020. "Behavioral Corporate Finance: The Life Cycle of a CEO Career," CEPR Discussion Papers 15103, C.E.P.R. Discussion Papers.
    9. Gürtler, Oliver & Struth, Lennart & Thon, Max, 2023. "Competition and risk-taking," European Economic Review, Elsevier, vol. 160(C).
    10. Jed DeVaro & Oliver Gürtler, 2020. "Strategic shirking in competitive labor markets: A general model of multi‐task promotion tournaments with employer learning," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 335-376, April.
    11. Woodruff, Christopher & Macchiavello, Rocco & Menzel, Andreas & Rabbani, Atonu, 2020. "Challenges of Change: An Experiment Promoting Women to Managerial Roles in the Bangladeshi Garment Sector," CEPR Discussion Papers 15085, C.E.P.R. Discussion Papers.
    12. Danielle Li & Lindsey R. Raymond & Peter Bergman, 2020. "Hiring as Exploration," NBER Working Papers 27736, National Bureau of Economic Research, Inc.
    13. Brian Fabo & Martina Jancokova & Elisabeth Kempf & Lubos Pastor, 2020. "Fifty Shades of QE: Conflicts of Interest in Economic Research," Working and Discussion Papers WP 5/2020, Research Department, National Bank of Slovakia.
    14. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    15. Nicolás Grau & Damián Vergara, "undated". "A Simple Test for Prejudice in Decision Processes: The Prediction-Based Outcome Test," Working Papers wp493, University of Chile, Department of Economics.
    16. Farias, B. & Rapôso, O. & Penna, T.J.P. & Girardi, D., 2021. "The Peter Principle and learning: A safer way to promote workers," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 576(C).
    17. Deserranno, Erika & Leon-Ciliotta, Gianmarco, 2022. "Promotions and Productivity: The Role of Meritocracy and Pay Progression in the Public Sector," CEPR Discussion Papers 15837, C.E.P.R. Discussion Papers.
    18. 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.
    19. Jones, Luke & Cseh, Attila, 2021. "Earning responsibility increases risk taking among representative decision makers," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 317-329.
    20. M. Antonella Mancino & Leonardo Fabio Morales & Diego F. Salazar, 2023. "Signaling Worker Quality in a Developing Country: Lessons from a Certification Program," Borradores de Economia 1259, Banco de la Republica de Colombia.
    21. Bhattacharya, D. & Shvets, J., 2022. "Inferring the Performance Diversity Trade-Off in University Admissions: Evidence from Cambridge," Cambridge Working Papers in Economics 2238, Faculty of Economics, University of Cambridge.
    22. Cheng, Yuan & Chang, Meng & Xue, Yanbo, 2020. "A computational study of promotion dynamics and organizational efficiency," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 560(C).
    23. Udhayanan, Prateksha & Mishra, Swasti S. & Rao, Shrisha, 2021. "Firm dynamics and employee performance management in duopoly markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 583(C).
    24. Ingrid Haegele, 2022. "Talent Hoarding in Organizations," Papers 2206.15098, arXiv.org, revised Mar 2024.

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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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