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Job Assignments under Moral Hazard: The Peter Principle Revisited
Author(s) -
Koch Alexander K.,
Nafziger Julia
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2012.00347.x
Subject(s) - moral hazard , perspective (graphical) , earnings , hierarchy , work (physics) , hazard , business , economics , actuarial science , computer science , microeconomics , engineering , finance , incentive , chemistry , organic chemistry , market economy , mechanical engineering , artificial intelligence
We show that inefficient job assignments arise in organizations even if there is full information about employees’ types and complete contracts are possible. Our model also provides a new perspective on the Peter Principle: the output of an employee who is promoted into a job for which he is not well suited need not decline postpromotion, because he is pushed to exert more effort. Although promotions are desirable for most employees, they make the least able in a hierarchy level worse off: for them earnings increase only because they work harder to compensate for their “incompetence.”