Promotions and the Peter Principle

NBER Working Paper No. 24343

Issued in February 2018

NBER Program(s):Corporate Finance, Labor Studies



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.

A non-technical summary of this paper is available in the May 2018 NBER Digest. You can sign up to receive the NBER Digest by email.



Acknowledgments

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Document Object Identifier (DOI): 10.3386/w24343

Published: Alan Benson & Danielle Li & Kelly Shue, 2019. "Promotions and the Peter Principle*," The Quarterly Journal of Economics, vol 134(4), pages 2085-2134.

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