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Two-Part Share Contracts, Risk, and the Life Cycle of Stars: Some Empirical Results from Motion Picture Contracts

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  • Darlene Chisholm
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    Abstract

    What determines the market value of a star? This paper examines the size of fixed payments to leading actors in the U.S. motion picture industry from a sample of contracts between 1959 and 1989. Competing explanations for the size of compensation, including rent capture, risk sharing, signalling, and portfolio optimization by studio executives are explored. The size of fixed payment across all contract types moves with an actor's history of participating in top-20 grossing films over the past five, ten, fifteen, and twenty films. Further, the impact of past top-20 successes is enhanced by the length of the actor's career. When contracts are divided into those with both fixed payments and share payments and those with only fixed payments, the fixed payment in two-part share contracts is influenced to some extent by risk concerns, in addition to the actor's star power. Fixed-payment-only contracts are most strongly influenced by measures of signalling and star power. Data on both types of contract provide strong support for the rent-capture theory: actors are paid rents upfront for the star value they add to the production. Copyright Kluwer Academic Publishers 2004

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Cultural Economics.

    Volume (Year): 28 (2004)
    Issue (Month): 1 (February)
    Pages: 37-56

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    Handle: RePEc:kap:jculte:v:28:y:2004:i:1:p:37-56

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    Web page: http://www.springerlink.com/link.asp?id=100284

    Related research

    Keywords: motion pictures; risk-sharing; share contracts; signalling; star power;

    References

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    1. Steven Albert, 1998. "Movie Stars and the Distribution of Financially Successful Films in the Motion Picture Industry," Journal of Cultural Economics, Springer, vol. 22(4), pages 249-270, December.
    2. Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
    3. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 389-432, May.
    4. Allen, Douglas W & Lueck, Dean, 1995. "Risk Preferences and the Economics of Contracts," American Economic Review, American Economic Association, vol. 85(2), pages 447-51, May.
    5. Darlene C. Chisholm, 1993. "Asset Specificity and Long-Term Contracts: The Case of the Motion-Pictures Industry," Eastern Economic Journal, Eastern Economic Association, vol. 19(2), pages 143-155, Spring.
    6. Weinstein, Mark, 1998. "Profit-Sharing Contracts in Hollywood: Evolution and Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 27(1), pages 67-112, January.
    7. Nancy L. Rose & Andrea Shepard, 1997. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 489-514, Autumn.
    8. Arthur De Vany & W. Walls, 1999. "Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box Office?," Journal of Cultural Economics, Springer, vol. 23(4), pages 285-318, November.
    9. Chisholm, Darlene C, 1997. "Profit-Sharing versus Fixed-Payment Contracts: Evidence from the Motion Pictures Industry," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 169-201, April.
    10. De Vany, Arthur & Walls, W David, 1996. "Bose-Einstein Dynamics and Adaptive Contracting in the Motion Picture Industry," Economic Journal, Royal Economic Society, vol. 106(439), pages 1493-1514, November.
    11. Alan Paul & Archie Kleingartner, 1994. "Flexible production and the transformation of industrial relations in the motion picture and television industry," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(4), pages 663-678, July.
    12. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
    13. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
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    Cited by:
    1. Alcalá, Francisco & González-Maestre, Miguel, 2010. "Copying, superstars, and artistic creation," Information Economics and Policy, Elsevier, vol. 22(4), pages 365-378, December.
    2. Skilton, Paul F., 2009. "Knowledge based resources, property based resources and supplier bargaining power in Hollywood motion picture projects," Journal of Business Research, Elsevier, vol. 62(8), pages 834-840, August.

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