The Bright Side of Peter-Principle Promotions

Abstract

Promotion of workers to managerial roles is often strongly based on workers' performance in their current roles rather than on their managerial aptitude. As a result, some workers end up in managerial roles despite having little managerial aptitude — a phenomenon known as the Peter principle. This paper provides a novel rationale for this apparent mismatch when promotions serve purely a matching purpose (i.e., do not serve as an incentive). We study a model in which workers care about meeting managers' expectations, and managers suffer from interpersonal projection bias: when forming expectations about workers' performance, they give too much weight to their own past performance. We show that it is in organizations' interest to appoint high-performing workers to managerial roles even if they have little managerial aptitude, because such managers will have high expectations of their workers' performance, which in turn induces high effort. Joint paper with Kimiyuki Morita and Takeharu Sogo.