Worker Discretion and Misallocation of Talent within Firms
Paper number: 01/08
Paper date: October 25, 2001
Paper Category: Working Paper
Hans K. Hvide and Todd R. Kaplan
We develop a theory of worker discretion over task choice within a form. Increasing the workers' discretion has a trade-off between the gains from workers using private information about their abilities, and the costs from adverse selection within the firm due to workers herding into prestigious tasks. The theory leads to the result that, in line with the Peter Principle, misallocation of talent within firms takes the form of too many workers undertaking tasks with a high return to ability. Moreover we find that the degree of misallocation of talent is decreasing in the degree of discretion given to workers. Keywords: Authority, Bureaucracies, Career Concerns, Discretion, Organizational Design, Misallocation, Peter Principle, Principal-Agent Theory, Sun Hydraulics, Wage Dynamics.