Promotions and the Peter Principle

Alan Benson (Minnesota)
Danielle Li (MIT)
Kelly Shue (Yale)

Abstract : The best worker is not always the best candidate for manager. In these cases, do firms promote the best potential manager or the best worker in her current job? Using microdata on the performance of sales workers at 131 firms, we find evidence consistent with the “Peter Principle,” which predicts that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance. We estimate that the costs of promoting workers with lower managerial potential are high, suggesting either that firms are making inefficient promotion decisions or that the benefits of promotion-based incentives are great enough to justify the costs of managerial mismatch.

Chains of Opportunity Revisited

Nicola Bianchi (Northwestern University)
Giulia Bovini (Bank of Italy)
Jin Li (University of Hong Kong)
Matteo Paradisi (Harvard University)
Michael Powell (Northwestern University)

Abstract : This paper studies career spillovers across workers, which arise in firms with limited promotion opportunities. We exploit a 2011 Italian pension reform that unexpectedly tightened eligibility criteria for the public pension, leading to sudden, substantial, and heterogeneous retirement delays for workers. We use administrative data on Italian private-sector workers in small to medium firms and leverage cross-firm variation to isolate the effect of retirement delays among soon-to-retire workers on the wage growth and promotions of their colleagues. We find evidence of spillover patterns consistent with older workers blocking the careers of their younger colleagues in firms with limited opportunities.

A Velvet Glove Needs and Iron Fist: Gift Delivery Matters for the Efficacy of Gift Exchange

Rosario Macera (Universidad de los Andes, Chile)
Vera te Velde (University of Queensland)

Abstract : We study whether two aspects of the gift delivery matter for workers' effort response to above-market wage increases: the employer-employee acquaintance and the upfront communication of the employer's first-order belief about the effort response to the gift. Randomizing acquaintance and expectation communication in an otherwise standard gift exchange field experiment, we show that acquaintance damages the gift exchange, while combining it with a clear statement from the principal about her expectation on reciprocal effort, amplifies it. The result that if gifts are delivered with a velvet glove (i.e., when the employer-employee have met) must be at the expense of using an iron fist (asking for effort in return) highlights that reciprocity is sensitive to subtle delivery details and highlights that a crucial aspect of compensation is its implementation.