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Superstars and Mediocrities: Market Failure in the Discovery of Talent -super-1

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  • Marko Terviö

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 , Wiley-Blackwell.

Suggested Citation

  • Marko Terviö, 2009. "Superstars and Mediocrities: Market Failure in the Discovery of Talent -super-1," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 829-850.
  • Handle: RePEc:oup:restud:v:76:y:2009:i:2:p:829-850
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2008.00522.x
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    Cited by:

    1. Sari Pekkala Kerr & William R. Kerr & William F. Lincoln, 2015. "Skilled Immigration and the Employment Structures of US Firms," Journal of Labor Economics, University of Chicago Press, vol. 33(S1), pages 147-186.
    2. Sari Pekkala Kerr & William R. Kerr & William F. Lincoln, 2015. "Firms and the Economics of Skilled Immigration," Innovation Policy and the Economy, University of Chicago Press, vol. 15(1), pages 115-152.
    3. John P. Conley & Ali Sina Önder & Benno Torgler, 2012. "Are all High-Skilled Cohorts Created Equal? Unemployment, Gender, and Research Productivity," Working Papers 2012.86, Fondazione Eni Enrico Mattei.
    4. Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2011. "Optimal Coexistence of Long-term and Short-term contracts in Labor Markets," Working Papers 11.08, Universidad Pablo de Olavide, Department of Economics.
    5. Alcalá, Francisco & González-Maestre, Miguel, 2010. "Copying, superstars, and artistic creation," Information Economics and Policy, Elsevier, vol. 22(4), pages 365-378, December.
    6. Piolatto, Amedeo & Schuett, Florian, 2012. "Music piracy: A case of “The Rich Get Richer and the Poor Get Poorer”," Information Economics and Policy, Elsevier, vol. 24(1), pages 30-39.
    7. Peter A. Groothuis & Kurt W. Rotthoff & Mark C. Strazicich, 2013. "Evaluation of Talent in a Changing World: The Case of Major League Baseball," Working Papers 13-15, Department of Economics, Appalachian State University.
    8. Massa, Massimo & Reuter, Jonathan & Zitzewitz, Eric, 2010. "When should firms share credit with employees? Evidence from anonymously managed mutual funds," Journal of Financial Economics, Elsevier, vol. 95(3), pages 400-424, March.
    9. Joel Waldfogel, 2015. "Digitization and the Quality of New Media Products: The Case of Music," NBER Chapters,in: Economic Analysis of the Digital Economy, pages 407-442 National Bureau of Economic Research, Inc.

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