Journal Article

Superstars and Mediocrities: Market Failure in the Discovery of Talent

Marko Terviö

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 2, pages 829-850
Published in print April 2009 | ISSN: 0034-6527
Published online April 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00522.x
Superstars and Mediocrities: Market Failure in the Discovery of Talent

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  • Information, Knowledge, and Uncertainy
  • Particular Labour Markets
  • Demand and Supply of Labour
  • Wages, Compensation, and Labour Costs

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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.

Keywords: D81; J24; J31; J41

Journal Article.  11036 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Particular Labour Markets ; Demand and Supply of Labour ; Wages, Compensation, and Labour Costs

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