Worker Discretion and Misallocation of Talent within Firms

Paper number: 01/08

Paper date: October 25, 2001

Year: 2001

Paper Category: Working Paper

Authors

Hans K. Hvide and Todd R. Kaplan

Abstract

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.

Worker Discretion and Misallocation of Talent within Firms Worker Discretion and Misallocation of Talent within Firms