Superstars

Could the existence of such superstars help explain extreme wage inequality? First it should be noted that Gabaix and Landier (2008) use such arguments to explain the large rises in CEO pay over the last two decades. In their model, CEOs differ in managerial talent and are matched to firms competitively. If the marginal impact of a CEO’s talent increases with the value of the firm under his control, then the best CEO manages the best firm. Furthermore, even very small differences in talent can produce large differences in remuneration. For example, they calibrate the model and find that the value of a firm increases by only 0.016% if they replace the 250th best CEO with the best CEO. Yet these small differences in talent translate into large pay differences as they are magnified by firm size. The same calibration shows that the number 1 CEO is paid over 500% more than the 250th CEO.

BANKERS’ PAY AND EXTREME WAGE INEQUALITY IN THE UK, Brian Bell and John Van Reene, April 2010