A company may promote or move a worker who has proven good at his job into a role he is poorly suited for, and do it on purpose. According to a new economic model, the reason is that once a worker’s talent is obvious, the firm can no longer profit from his overconfidence.
The paper, by Matthias Fahn and Nicolas Klein, was published online in the Journal of Labor Economics on October 9, 2025.
How overconfidence pays the firm
The authors build a model of a long-term employment relationship between a firm and a worker who thinks more highly of his abilities than the evidence so far supports.
While the worker’s real talent is still unproven, the firm can exploit that overconfidence.
That advantage disappears once the worker proves himself. When his talent becomes evident in his current job, there is no longer a gap between what he believes and what is known, and the firm loses the margin it was earning from that gap. His current position becomes less profitable for the firm.
A new reason for the Peter Principle
At that point, the firm may have an incentive to reassign the worker who has proved himself good at his current job, even to a position he is not well suited for.
The authors present this as a new microfoundation for the Peter Principle, the familiar observation that employees tend to be promoted until they land in a job they cannot do well. In their account, the mismatch between employees and tasks can be intentional rather than an accident of promotion rules.
The work is theoretical. It offers a mechanism that could explain why firms move proven performers into ill-suited roles, rather than measuring how often this happens in real workplaces.
The model’s prediction is pointed: the moment a worker clearly excels, he becomes a candidate for a move that suits the company’s books better than his skills.
Study Details:
- Title: The Dynamics of Exploiting Overconfident Workers
- Authors: Matthias Fahn, Nicolas Klein
- Journal: Journal of Labor Economics
- Publication Date: October 9, 2025
- DOI: 10.1086/739053