Are Stars Worth their Pay?

Abstract

It is often criticised that certain stars — e.g. opera singers and actors, soccer players, CEOs, lawyers and medical doctors and ‘stars’ at internet and software companies — are not worth their pay. This paper shows within an incentive contract that payments exceeding incremental contributions are not necessarily an anomaly. A necessary condition is that the agents have some intrinsic motive to perform well even in the absence of incentives. This in turn explains that rewards are often very high particular in those fields (e.g. arts, sports and also in the new economy), where one expects that incentives are less important due to an agent’s intrinsic motive to perform well anyway. In fact, a positive incremental profit contribution of a particular type is in general neither necessary nor sufficient.

I am grateful for valuable comments from the discussant, Professor Schwalbach, and other participants at the conference.