The Peter Principle: A Theory of Decline
By Edward P. Lazear. Journal of Political Economy, 2003
185 citations recorded by the source corpus.
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 the transitory component is 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.
Subfields: Economics and Econometrics, Safety Research
View Paper: https://www.semanticscholar.org/paper/a40c507eaa61c6d93e3c4cb76416ae0467f1940f
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In Economics and Econometrics
- Simon C. Parker
- James Liang
- Hui Wang
- Edward P. Lazear
- M. Alan
- Tomasz Mickiewicz
- Saul Estrin
- Andrew Henley
In Safety Research
Citations in the corpus
- The Value of Bosses (2014, unknown): “25 See Lazear ð2004Þ for a theoretical exposition of promotion decisions under uncertainty and the effects of error.”
- Demographics and Entrepreneurship (2014, background): “As argued earlier, a worker’s ability to acquire skills depends on his position in the firm, which depends on his rank, defined as the proportion 14 This transitory and permanent ability structure was used in Lazear (2004b).”
- Do serial entrepreneurs run successively better-performing businesses? (2013, background): “Second, it is possible that only entrepreneurs who were unusually “lucky” in their first venture might choose to start a second venture; but their performance eventually reverts to the mean (Lazear, 2004).”