Paul Krugman reports on increasing inequality at the top end of the US income distribution:
There was hardly any rise in the share of income going to people between the 90th and 95th percentiles [between 1979 and 2003]: almost all the gain went to the top 5 percent. And most of the gain went to a very small elite. The income share of the top 1 percent went from 9.6 to 17.5, percent accounting for more than 70 percent of the top decile's gain. The income share of the top 0.25 percent went from 4.9 to 10.5, accounting for a bit more than half the total gain.
Leave aside – though we shouldn’t – the question of justice. Why has this happened?
The most popular theory is Sherwin Rosen’s economics of superstars. Tiny differences in talent, he said, can lead to enormous inequalities in income; there are sharply increasing returns to ability. This is why, say, Beyonce, earns millions more than singers who are only slightly less talented or beautiful than her.
Maybe this is happening at the top end of the labour market. Superstar economics – say in the market for chief executives – is becoming more pronounced. What have always been increasing returns to talent are actually increasing further.
That’s the theory. Here is a brilliant paper (pdf) which casts doubt on it.
Olivier Gergaud and Vincenzo Verardi studied the prices of Pokemon trading cards.
Now, the thing about these is that the characteristics of the cards are easily observed, so there’s no disputing what talent is. They then estimated hedonic prices for the various cards, and compared these to actual prices.
They found that there is an element of Rosen’s superstar phenomenon; the highest quality cards command a price even higher than their qualities warrant, suggesting there are increasing returns to talent.
However, this is only part of the story. There’s also some overpricing of even modestly talented cards. Superstars, then, needn’t be more talented than others. They say:
It is possible to be untalented and successful; anybody may become one day a superstar, whatever his talent level.
This, they say, happens because consumers need some common culture, and their desire for idols leads them to converge sometimes upon people/cards of modest ability; think Chantelle.
Which raises the question. Are top-earning chief executives Beyonces or Chantelles?
You can guess my Bayesian prior. The question is: what evidence can shake it?