The latest Review of Economic Studies has a great article (ungated here) by Marko Tervio. I'll summarize.
CEOs, actors, directors, musicians, authors, and athletes make big bucks because:
- Desired abilities are rare and lasting.
- It is very expensive to try someone new.
- Everyone can see which trials worked or not.
- Winners are free to demand more money or walk.
Given these conditions, a few proven winners make big bucks, and few new folks get tried. After all, a new trial who wins will soon demand as much as other winners. Here winners avoid retirement to keep milking their gravy train, and small biases in weak signals on new guys to try can magnify into great social injustice.
Condition 4 is crucial. When long term deals are allowed, more folks are tried, because a few successes can pay for lots of failures. Folks being tried get paid more, and there are more better winners who retire earlier and are paid less even when free to walk. Distorted signals about who to try matter less. Such long term deal gains were realized, for example, in the US movie studio system of the 1920-40s, the old US American baseball club system, and even now via exclusive long-term music album deals.
Over the last century, however, legislatures and courts have consistently moved to limit and prohibit such long term contracts, thereby increasing inequality and decreasing productivity. France even forbids artists from selling the full value of their paintings. The key tipping factor here seems to me to be a public displeased by seeing gains by admired musicians, actors, athletes, artists etc. going to less admired others. The word "slavery" is often invoked. For example, music fans can be outraged to see their favorite musicians shackled to ungenerous album deals.
So our vast wage inequality of superstar CEOs, artists, athletes, etc. is caused not by a lack of sensible regulation to limit random cruelties of unfettered markets, but by a public preferring its heroes unshackled, even if those heros had preferred otherwise. Now maybe insuring heroes against financial variations imposes a negative externality on wider admiring publics, one large enough to justify preventing long term deals. But for now count me as skeptical; I'd rather allow CEO and other superhero "slavery," for their good and ours.
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