Non-Common Priors, Incentives, and Promotions: The Role of Learning

Matthias Fahn and Nicolas Klein

No 2023-06, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: Consider a repeated principal-agent setting with verifiable effort and an extra profit that can materialize only if the agent is talented. The agent is overconfident and updates beliefs using Bayes’ rule. The agent's principal-expected compensation decreases over time until high talent is revealed; thus he may be employed only if beliefs are sufficiently low. We apply these results to a firm's promotion policy, which may be based on success in a previous job even if jobs are uncorrelated. This provides an explanation for the "Peter Principle" in a setting with verifiable performance and highly confident workers (Benson et al., 2019).

Pages: 32 pages
Date: 2023-07
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
Note: English
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Working Paper: Non-Common Priors, Incentives, and Promotions: The Role of Learning (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:jku:econwp:2023-06

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