Things Can Only get Worse? An Empirical Examination of the Peter Principle.

The results reported in this paper suggest the possible operation of the Peter Principle in a large hierarchical financial sector firm. This result holds even after we allow for variation in optimal effort over stages in the hierarchy. The method also allows us to attribute the contributory factors for the observed fall in performance after a promotion. It appears that approximately 2/3 of the fall is due to the Peter Principle and 1/3 due to lessening incentives.We acknowledge helpful comments received from Hans Hvide, and session participants at the 2005 Scottish Economic Society Conference where and earlier version of this paper was presented