Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278552 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. 2306
Publisher: 
Johannes Kepler University of Linz, Department of Economics, Linz
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).
Document Type: 
Working Paper

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