For CEOs, actors, and directors, their salary is really the least relevant cost factor. If you’re running a large corporation, or making an expensive movie or television production, given the number of people involved, the risk is the whole project rather than the individual. Hiring an incompetent CEO (might) harm the entire company, causing losses that make his salary look trivial. Same thing goes for hiring a bad director or an actor for a major role. I doubt actors for minor or really minor roles suffer from this effect. For the big shots, their salary is not the determining cost, so “enslaving” them wouldn’t change too much.

Authors and musicians carry signifant brand risk. That is, if I publish too many bad books or release too many bad CD’s, my brand could suffer, and individuals who have some sense of their abilities (the model requires individual ignorance of talent, which is not wholly realistic) will look for other record labels / publishers. Consumers will be hesitant to purchase my brand. Thus, the main expense is not (necessarily) their salaries. I have some other specific ideas of where this fails, but I am not sufficiently familiar with the industries to voice them with confidence.

Athletes I know relatively little about the structure of. This may have a more significant effect there.

This is still an interesting and useful theory; I’m just not sure that binding contracts are the correct solution.

I refreshed myself on the common pool problem (it’s been 25 years since I took an economics course). I think you are suggesting that people aren’t motivated by the tournament because the big winner gets parachuted in externally from the common pool. I’m not sure that’s true. While it is true, in my experience, that CEO’s and other senior executives are often hired from outside the firm; I think most of the people competing in the tournament see that as the “common pool”. Or to make it personal, we all know the guys who get parachuted in, and have been those guys as well.

Ahem, Robin, *copyright* *cough*. Monopoly power is OBVIOUSLY going to increase inequality of opportunity! Read Boldrin & Levine.

I dunno how you, being an economist, could miss that.

As for athletes and CEOs, I think you can explain that by the increased cult of fame and increased lobbying for corporate benefits, respectively.

http://www.pay-without-performance.com/Weisbach_review.pdf

In many of the disciplines you cite, there is a large random component to performance. The success of a movie is notoriously difficult to predict, athletes have up years and down years, and sometimes businesses do well despite the actions of their CEOs. Longer contracts help to average over such random forces, thus moderating just how desirable a particular candidate is.

David, rewarding big performers to encourage effort suffers a common pool problem when you usually hire outsiders.

Tom, 9000 words is more concise than 400 words?

I also suspect that the ability to be a reasonably effective CEO is not all that rare. Furthermore, I also suspect that CEO performance (in terms of company stock price) is frequently a matter of dumb luck, much like mutual fund manager performance: past performance is no guarantee of future results.