Most bureaucracies today are rule-based. This is a result of a powerful intellectual tradition that argues that allowing discretion in decision making could lead to favoritism and collusion, with substantial costs to the organization. This paper studies one particular public sector bureaucracy, the Pakistan Administrative Services (PAS) in Punjab and presents novel evidence that when senior bureaucrats have discretion to promote juniors they do so meritocratically. I create a newly digitized civil servant-month panel data-set (1983-2013) which combines the universe of personnel records of PAS civil servants in Punjab, Pakistan with two key measures of merit of the junior (1) recruitment exam ranking that is publicly observable (2) historical tax collection by juniors that is private information of a particular set of seniors. I exploit two rules within the government to get exogenous variation in both the set of seniors and their power to promote juniors. First, results show that, in the long run, as the promotion power of seniors increase, high merit junior bureaucrats are more likely to be promoted than low merit ones. Second, with increases in the promotion power of seniors they are more likely to pull high merit junior bureaucrats into their own team and promote them, while the effect reverses for low merit juniors. This suggests that self-interest of the person exercising discretion is one mechanism behind meritocracy. Third, as promotion power of senior increases, those juniors who are observationally good performers but not stars according to private information of the senior, have 3 times lower probability of being promoted than those who are top performers in both dimensions. A similar effect is seen for those that are observationally poor performers. This suggests that seniors can decipher not just hidden lemons from the star performers but also hidden gems from the bottom of the performance distribution. These results suggest that there is value from allowing discretion and have wider implications for how we think about the use of subjective judgement in organizations.
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