The Peter Principle and exploiting overconfident workers

This paper studies a long-term employment relationship with an overconfident worker who updates his beliefs using Bayes’ rule. Once the worker has proven to be a good match, exploitation opportunities disappear. Then, it may be optimal to either end the relationship or promote/transfer the worker to a different role, especially if the new position offers fresh opportunities to exploit his overconfidence. In doing so, we offer a novel microfoundation for the “Peter Principle,” rooted in this dynamic of overconfidence exploitation. Our analysis addresses key limitations in previous explanations, particularly those related to the findings of Benson et al. (2019), where the Peter Principle was observed among highly confident workers.

Look at it this way: you can always promise the worker, at each new switch, a career trajectory that probably he or she will not be able to attain.  So you boost them in the hierarchy, with such promises, they are incompetent for the new roles they receive, but you pay them in promised trajectory rather than cold hard cash.  That is from Matthias Fahn and Nicholas Klein, now out in the Journal of Labor Economics.  Offer them a deanship now, or at least chair of the department.  Via the excellent Kevin Lewis.