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Wednesday, May 25, 2005

Superstar (and CEO) Economics (via Stumbling and Mumbling)

The distribution of income in many fields is highly skewed, with the top earner making many, many times the average. Chris Dillow at Stumbling and mumbling looks at a London journalist that makes 11 times the average journalist's salary. He addresses the question: "Why do some people make such statospheric amounts of money". His answer harks back to early work on superstar economics, where tiny differences in ability result in vast differences in income. In short, they make these amounts because:
  • They deliver customers (readers in this case). Talk of old-boy networks aside, businesses are built on the principal of making money;
  • Their services are duplicable - once an article is written, it can be cheaply distributed to many readers (and even syndicated;
  • Average ability is a poor substitute for superior ability. In other words, the payoff to being a little bit better is huge. You can view this in a tournament framework - it doesn't matter if you win by an inch, you still win;
  • They have brand recognition.
Click here for the whole article.

The same question could be asked of CEOs (and often is, by people who don't understand business): Why do a CEOs at some companies make 500 times what the average worker does?My sense is that the same answers apply.

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