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Job Assignments under Moral Hazard: The Peter Principle Revisited


  • We thank Mathias Dewatripont, Guido Friebel, Paul Heidhues, Ian Jewitt, Thomas Kittsteiner, Matthias Kräkel, Johan Lagerlöf, Meg Meyer, David Myatt, Urs Schweizer, John Sutton and two anonymous referees for helpful comments. Nafziger is grateful to Nuffield College, University of Oxford for its kind hospitality.


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.”