Abstract

http://ssrn.com/abstract=403880
 
 

References (20)



 
 

Citations (17)



 


 



The Peter Principle: A Theory of Decline


Edward P. Lazear


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

April 2003

IZA Discussion Paper No. 759

Abstract:     
Some have observed that individuals perform worse after being promoted. The Peter Principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter Principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter Principle effect, and the more important is the transitory component relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

Number of Pages in PDF File: 40

Keywords: Peter Principle, Regression to the Mean, Stochastic

JEL Classification: J00, J6

working papers series


Download This Paper

Date posted: May 25, 2003  

Suggested Citation

Lazear, Edward P., The Peter Principle: A Theory of Decline (April 2003). IZA Discussion Paper No. 759. Available at SSRN: http://ssrn.com/abstract=403880

Contact Information

Edward P. Lazear (Contact Author)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-9136 (Phone)
650-723-0498 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Feedback to SSRN


Paper statistics
Abstract Views: 4,432
Downloads: 595
Download Rank: 23,927
References:  20
Citations:  17

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.390 seconds