Is Texas Rangers shortstop Alex Rodriguez worth $25.2 million a year?
How about NBC news personality Katie Couric: Does she deserve her $13
million to $15 million salary, perhaps three times what veteran journalist
Mike Wallace makes? And why did the members of Aerosmith have to split
a paltry $25 million last year while U2's crew shared earnings of $69
Mere economists will probably never fully fathom such profound mysteries,
but it's not because huge celebrity salaries have escaped their attention.
The question of why superstars are paid so much more than the average
person in their fieldfar more, indeed, than their close competitorswas
the focus of a 1981 paper "The Economics of Superstars" by University
of Chicago economist Sherwin Rosen.
About numerous professionsfrom comedians to economists to classical
musiciansRosen made two key observations. First, "performers
of the first rank ... have very large incomes." Second, there are
"substantial differences in income between them and those in the
second rank, even though most consumers would have difficulty detecting
more than minor differences. ..." Standard economic theory provides
no explanation for these observations, he noted. "Competitive theory
is virtually silent about any special role played by either the size of
the total market or the amount of it controlled by any single person"
because products are assumed to be virtually identical.
But Rosen provided a careful and complex explanation focusing on two things:
imperfect substitution among different sellers and scale economies of
joint consumption technologies. The first simply means that lesser talent
is a poor substitute for greater talent. "Hearing a succession of
mediocre singers does not add up to a single outstanding performance,"
The second notion is that certain technologies allow very few sellers
to service the entire market. Before the advent of the phonograph, your
town's local singing star might be the best you'd ever hear; with Edison's
invention, the voice of Enrico Caruso could spread across the globe.
"When the joint consumption technology and imperfect substitution
features of preferences are combined," Rosen observed, "the
possibility for talented persons to command both very large markets and
very large incomes is apparent."
Does competitive innovation diminish superstars?
Twenty years later, Boldrin and Levine pick up where Rosen left off.
In a short section of "Perfectly
Competitive Innovation," they apply their theory of innovation
to the phenomenon of superstars. One might suspect that superstar salaries
have something to do with monopoly power, they observe, but that needn't
be the case. Superstars will emerge even under perfect competition because
of the impact of reproduction technology on prices paid to laborers of
"Our model predicts that superstars should abound in industries where
the main product is information which can be cheaply reproduced and distributed
on a massive scale," wrote Boldrin and Levine. "Such is the
case for the worlds of sport, entertainment, arts and letters, which coincides
with the penetrating observations that motivated Rosen's original contribution."
(They note that their idea is just one of a number of possible explanations
for the super-salary phenomenon, but they suggest it is simpler, more
elegant and more realistic than other theories that have been offered.)
Their model shows that, if there are indivisibilities, technological changes
in reproduction that lower prices and broaden markets will initially be
beneficial to all entertainers. Real wages will increase at a uniform
rate for all types of labor. "Eventually, though, further improvements
in the reproduction technology lead to a 'crowding out' of the least efficient
...," they wrote. As reproductive capacity increases still further,
the superstar will capture the entire market and gain disproportionately
Thus, even very small differences in skill are magnified by technology
that copies and distributes information with increasing ease. "Our
theory," concluded Boldrin and Levine, "predicts that the increased
reproducibility of information will continue generating large income disparities
among individuals of very similar skills and in a growing number of industries."
The irony, of course, is that rapid innovation in information
technologychampioned by the underdogs at Napster and elsewheremay
result in an expanded galaxy of superstars and a growing gap between their
salaries and ours.