The important thing to realize is that bad developers who are kept around tend to survive because they're well liked by people who make the decisions. If you raise concerns about their performance then you're picking a fight that you can very quickly lose. I've seen people get hung out to dry when they escalate concerns about people like that, and even if they were right it still leaves them in a much worse position for their next job hunt.
In most cases I'd tend to agree with OP that the right move for an employee in that situation is to lay low and start looking. If the situation isn't yet completely unbearable there's no need to just hand in your two weeks' notice, but it's worth looking for the exits.
I agree it is context dependent, but I was trying to show that it's not a binary choice between escalating or leaving. You can do both. If you lose the battle, at least you tried. I've left some jobs too early and regretted it. I could've done more and I should have done more. Probably, I would've failed anyway. Corporate politics and company culture is such a strong force.
The reality is many direct managers have little visibility into their reports day-to-day work because they are not hands-on enough. They should be checking the work product. Example: They should at least be looking at PRs and even participating in code reviews themselves. If you proposed this to some "engineering managers" I am familiar with, they would say this is not their job and you are crazy for even mentioning it. (I'd tell them I disagree about that, too.) This is why coworkers need to escalate performance problems: because many of the people making decisions do not know what is going on.
The important thing to realize is that bad developers who are kept around tend to survive because they're well liked by people who make the decisions. If you raise concerns about their performance then you're picking a fight that you can very quickly lose. I've seen people get hung out to dry when they escalate concerns about people like that, and even if they were right it still leaves them in a much worse position for their next job hunt.
In most cases I'd tend to agree with OP that the right move for an employee in that situation is to lay low and start looking. If the situation isn't yet completely unbearable there's no need to just hand in your two weeks' notice, but it's worth looking for the exits.