Does the Peter Principle Apply to Paula? Incentive Responsiveness and Promotion Decisions in Financial Institutions
Publication Date
4-30-2026
Abstract
Firms face a costly trade-off in promotion decisions: reward top performers to motivate effort or select those with the highest expected managerial performance. Exploiting mandatory disclosure requirements in the U.S. mortgage industry, we test whether firms mitigate these costs by placing greater weight on managerial fit for workers who respond less strongly to promotion incentives. A natural source of such heterogeneity is gender. Prior research suggests women are more likely to exhibit traits such as greater risk aversion and lower competitiveness, which moral hazard models predict dampen effort responses to promotion-based incentives. Among 88,000 loan officers at approximately 1,000 firms, we find that firms' promotion decisions favor current sales performance over managerial fit for male workers, consistent with the Peter Principle. In contrast, firms place greater weight on managerial fit for female workers, mitigating the Peter Principle mismatch costs. We also provide direct evidence on the mechanism that promotion incentives are less consequential for women's behavior than for men's: female loan officers reduce effort less than male loan officers after being passed over for promotion to manager, increase effort less when managerial openings arise, and are less likely to leave the industry following high performance. Our results show that firms mitigate the incentive-fit conflict in promotions in a manner consistent with economic theory.
Document Type
Article
Keywords
Promotion, Peter Principle, gender, incentive-fit trade-off, financial institutions, mortgage industry
Source
SMU Cox: Finance (Topic)
Language
English
