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Wednesday, April 25, 2018

The Peter Principle: Promotions and Declining Productivity

Edward P. Lazear
Hoover Institution and Graduate School of Business
Revision 10/12/00


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.

The paper is here.