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Superstars and mediocrities: A solution based on personal income taxation

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  • d’Andria, Diego

Abstract

The markets for talent often produce large income inequality and therefore raise political attention. While such inequality can be due to superstar dynamics or factor complementarities, Terviö (“Superstars and Mediocrities: Market Failure in The Discovery of Talent”, the Review of Economic Studies, 2009) first proposed a market failure that was previously unknown to the literature, pointing to long-term contracts as a solution. I extend the model in Terviö (2009) to include personal income tax policy reforms and demonstrate that tax design can be employed as a solution to the market failure when long-term contracts are unfeasible. With reasonably small enough entry payments that novice workers would sustain to compensate employers for the possibility to be discovered as high-talent types, both a progressive tax and a tax incentive on entry wages are found effective. The tax incentive on entry wages, though, can be used even with very large deductible entry payments and with overall negative net entry wages.

Suggested Citation

  • d’Andria, Diego, 2018. "Superstars and mediocrities: A solution based on personal income taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 459-463.
  • Handle: RePEc:eee:jeborg:v:149:y:2018:i:c:p:459-463
    DOI: 10.1016/j.jebo.2018.01.011
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    References listed on IDEAS

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    1. MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-1055, December.
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    Keywords

    Superstars; Personal income tax; Entry wage; Talent; Learning;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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