The Peter Principle: A Theory of Decline

Abstract

This paper is forthcoming in a Special Issue of the Journal of Political Economy in Memory of Sherwin Rosen. Sherwin Rosen was my most important teacher, my valued colleague and dear friend. Sherwin served on my thesis committee and taught me much of what I know. Throughout the thirty years that we were friends, Sherwin was a constant source of inspiration, wisdom, and kindness. A deep thinker who opened up a number of areas or research, Sherwin was interested in hierarchies and promotion, so this paper is very much in keeping with his research agenda and derives from it.

Burning Out in Sequential Elimination Contests

“…Indeed, in his model this is required to ensure that the effort in each stage 19 See Lazear (2004) for an analysis of why some academics are burnt out after getting tenure. 20 In boxing the contestants rarely get "burnt out" in the first round or first few rounds.…”

Team production benefits from a permanent fear of exclusion

“…those who receive permanent status first immediately become the weakest link. This resembles Lazear's (2004) explanation for the "Peter principle", i.e. the empirical observation that individuals perform worse after being promoted.…”

“…Especially novice permanent workers substantially reduce their effort upon becoming permanent, a finding similar in spirit to the Peter principle (cf. Lazear, 2004). Overall, workers do not perform significantly better when they receive probation contracts than when they are completely protected by long-term contracts.…”

Why demotion of older workers is a no-go area for managers

“…In internal labor markets where promotions are a widespread used incentive measure, one might expect that the reverse measure -demotion -be more common as promotions are based on expectations of future performance which could be misguided (Lazear, 2004). It therefore remains key to understand organizational behavior and why an obvious 'blackboard' route, i.c.…”