TY  - JOUR
AU  - Lazear,Edward P.
TI  - The Peter Principle: Promotions and Declining Productivity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8094
PY  - 2001
Y2  - January 2001
UR  - http://www.nber.org/papers/w8094
L1  - http://www.nber.org/papers/w8094.pdf
N1  - Author contact info:
Edward P. Lazear
Graduate School of Business
Stanford University
Stanford, CA 94305
Tel: 650/723-9136
Fax: 650/723-0498
E-Mail: lazear@stanford.edu
AB  - 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.
ER  -