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Superstars and Mediocrities: Market Failure in the Discovery of Talent

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Author Info
MARKO TERVIÖ

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Abstract

A basic problem facing most labour markets is that workers can neither commit to long-term wage contracts nor can they self-finance the costs of production. I study the effects of these imperfections when talent is industry-specific; it can only be revealed on the job, and once learnt becomes public information. I show that firms bid excessively for the pool of incumbent workers at the expense of trying out new talent. The workforce is then plagued with an unfavourable selection of individuals: there are too many mediocre workers, whose talent is not high enough to justify them crowding out novice workers with lower expected talent but with more upside potential. The result is an inefficiently low level of output coupled with higher wages for known high talents. This problem is most severe where information about talent is initially very imprecise and the complementary costs of production are high. I argue that high incomes in professions such as entertainment, management, and entrepreneurship, may be explained by the nature of the talent revelation process, rather than by an underlying scarcity of talent. Copyright © 2009 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2008.00522.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 76 (2009)
Issue (Month): 2 (04)
Pages: 829-850
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Handle: RePEc:bla:restud:v:76:y:2009:i:2:p:829-850

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  1. Francisco Alcalá & Miguel González-Maestre, 2009. "Copying, Superstars, and Artistic Creation," Working Papers 0902, International Economics Institute, University of Valencia. [Downloadable!]
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This page was last updated on 2009-11-22.

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