The economics of the Peter principle

The Peter principle isn’t just folk wisdom - it’s founded in economic theory. A new paper by Matthias Krakel shows how:

Competitive careers systems have an inherent tendency to promote the least productive individuals, thus leading to mediocracy.
The intuition for this result comes from the fact that more productive people have better fall-back positions than less productive ones when failing in the competition for top positions. Hence, highly productive people have only moderate incentives to win the competition for top jobs, whereas individuals with low productivity have strong incentives to avoid their rather unattractive fall-back positions.

This doesn’t just explain basic explain basic facts about your own workplace. It also explains why politicians are so mediocre.
However I also fear it also justifies not only wage inequalities, but increasing inequalities. Maybe companies have to pay CEOs fortunes to offset productive people's lack of incentive to chase top jobs.
Worse still, if ordinary economic growth means that productive people over time can earn increasingly good wages, then CEOs’ wages have to increase even more in order to offset the tendency for such people to happily do good lower level jobs.
There are, though, perhaps more basic messages here. Competition needn’t necessarily yield optimum outcomes; “survival of the fittest”  mightn’t be the most efficient principle. And the organization of corporate hierarchies might be inefficient, not (just) from heterodox perspectives, but from the perspective of conventional neoclassical economic theory itself.

Comments

[reason]

Unless you can actually distinguish who is a productive person (and if unproductive people are actually climbing the heirachy, you must assume you can't), then raising the salary in all probability just increases what you are paying an unproductive person. So why should you do it?

[phil jones]

Seems rather convoluted. Isn't the best explanation that if you have a productive, useful person working under you, you're less inclined to give them the encouragement they need to move on up. Whereas, when you've got someone working for you who's a drag on resources or damned nuisance, you're happy to help push them out, even if it's up-and-out.

Alternatively, some people might be ineffective, *because* they're focussing more of their time and energy on climbing the ladder rather than doing their job. They're not incompetent per-se, just focussing resources on personal advancement rather than the kind of competence that benefits the company.

[placebo]

I've long been an advocate of the "Gravity Principle." All new hires should start at the top and fall to their level of competence.

[Peter]

On anecdotal evidence, I would think that rather than being incentivised by a weak fall back position, the mediocre are spurred on by massive ambition and rampant egos, usually completely unrelated to ability.

However, it is often true that they were spectacularly bad at the jobs they did before and thus the drive for promotion can be a function of the cognitive dissonance of the reality of being a completely useless dickhead clashing with the self-image of being incredibly important, very wonderful and oh so handsome. We need psychology as well as economics to try and make sense of it all.

[(Layman) Mike]

Phil Jones has nailed it.
People capable of delivering get chained to the coal face because that's where they're needed. People not capable of delivering acquire "political skills" to survive. Unfortunately, it's "political skills" that get people promoted. For example, The Apprentice.
Pay gaps widen because managers award themselves bonuses for meeting targets, met entirely through the efforts of the people at the bottom of the hierachy. The people at the bottom perform all the day-to-day management, while those at the top are responsible for strategies. Companies go bust through following the wrong, or no, strategy. For example, the current bank bankruptcies.
Extending this to a country, the lower earners contribute most to the economy, the highest paid contribute least.

[Rob]

Competition needn’t necessarily yield optimum outcomes; “survival of the fittest” mightn’t be the most efficient principle.

The fault there is not with the Darwinistic principle, but with the selection criteria. 'Fittest' could mean 'puts most effort into climbing the greasy pole', but it doesn't have to mean that. Evolution in the natural world contains plenty of examples of organisms that were adapted to one environment but failed when that environment changed (and, over evolutionary time, had to adapt to the new environment).

Hence, highly productive people have only moderate incentives to win the competition for top jobs, whereas individuals with low productivity have strong incentives to avoid their rather unattractive fall-back positions.

Is there not an extent to which the superior productivity of high-productivity individuals means that they can match or beat their lesser rivals even while making less effort? Of course, if the talents required to win the top jobs are not the same as the talents required to excel in them, this will not matter.

[Innocent Abroad]

Agree with Phil Jones and Layman Mike.

Still, there's a silver lining. Because bosses behave this way, workers are more likely to perceive them as c***s and so join trade unions.

[Gnomesofdiscord.blogspot.com]

Very interesting and seems to support my experiences of people in the workplace. However, I think that egotism and ambition are indeed more of a drive than a "weak fallback position", unless by that you mean that they can't stand the job they're currently in. This is certainly true of someone I work with - incompetent at best but feels that the job is completely beneath them. Ironically they just got a new, more "prestigous" (but crucially, not more highly paid) job in another department...!

[Planeshift]

So Chris, does this mean your advice is for me to slack off in work?

[william]

The blog post was really good, but then I read the paper and - it's only a model. Zero evidence. Which is a shame, as it meshes perfectly with my preconceptions.

Anyway, I'm not sure about lower-downs having a better fallback position. My fallback is pretty much that: falling backwards.

[jameshigham]

Hence, highly productive people have only moderate incentives to win the competition for top jobs, whereas individuals with low productivity have strong incentives to avoid their rather unattractive fall-back positions.

What?!! By what logic is this meant to be?

[john malpas]

I can se how 'highly productive people' might rise in the mafia but elsewhere is it not more likely because of being an old schoolmate, a relative or any other such social kinship.