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Mediocrity in Talent Markets

  • Tervio, Marko

A model of a labor market is proposed where the level of individual talent can only be learned on the job and where job positions are scarce. Inability to commit to long-term contracts leaves firms with insufficient incentives to hire novices, causing them to bid excessively for the pool of revealed talent instead. This causes the market to be plagued with too many mediocre workers and inefficiently low output levels, while simultaneously raising the wages for high talents. This problem is most severe where information about talent is initially very imprecise but revealed relatively quickly on the job. I argue that high incomes in professions such as entertainment, team sports, and entrepreneurship, may at least partly be explained by the nature of the talent revelation process in those markets. I suggest historical episodes that could be used to identify the inefficiency and the excessive talent rents predicted by the model.

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Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt7411j2vx.

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Date of creation: 06 Nov 2003
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Handle: RePEc:cdl:indrel:qt7411j2vx
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  1. O'Flaherty, Siow A., 1990. "Up Or Out Rules In The Market For Lawyers," Discussion Papers 1990_29, Columbia University, Department of Economics.
  2. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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  8. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  9. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
  10. Glenn MacDonald & Michael Weisbach, 2001. "The Economics of Has-Beens," NBER Working Papers 8464, National Bureau of Economic Research, Inc.
  11. Harris, Milton & Weiss, Yoram, 1984. "Job Matching with Finite Horizon and Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 92(4), pages 758-79, August.
  12. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  13. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  14. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  15. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  16. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
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