Friday, March 9, 2012

Are superstar cricketers like landlords?

Rajeev makes an interesting observation about India's high-paid superstar cricketers and the role of happenstance and good-luck in contributing to their fortunes,

Since the 1980s, the best cricket players in India have been growing ever richer. However, that they earn a hundred times what their predecessors used to earn doesn't mean that they are a hundred times as good at the game. They have grown richer mainly because Indians now watch television. In some other countries, the benefits have gone to Football players, while in other countries, Basketball players have gained. These beneficiaries may be great athletes, and they "deserve" their incomes in the sense that this is what others willingly pay them in the marketplace. They are like landlords who have seen the value of their properties explode because someone else built a highway or a railway station nearby.

I am in complete agreement on the role of luck in these cricketers fortunes, especially in relation to players from other sport like Hockey. But the analogy with landed rentier-class enjoying the windfall value appreciation from infrastructure and commercial development in the neighbourhood is debatable.

For one, unlike unproductive landlords, these cricketers are talented, hard-working, and productive and deserve to be rewarded. However, even if the market agrees, it is questionable as to whether they "deserve" their current extraodrinary incomes. Critics are right in asking whether their incomes are disproportionate to their abilities and productivity, especially when considered in relation to their peers in other more globally competitive sports.

But this analogy can be extended to many other areas and stands at the heart of the debate about executive compensation itself. Do traders, bankers, and corporate executives "deserve" the fantastic compensation packages they receive? While conceding their abilities and even a substantial premium in their salaries, it is very difficult to justify the size of their remuneration.

Consider this. Two friends, of more or less equal abilities, pass out of engineering college and pursue careers in core engineering and in finance. The former does an MS while his friend does an MBA, both from prestigious universities with equally stiff entry competition. Ten years down the line, the financial specialist earns five (or many) times more than the engineer.

It is too much a stretch to claim that the former has acquired superior skills or is more productive than the latter. The most charitable thing that can be said about his vast riches is that he was lucky to choose the right profession at the right time. And within the profession, he happened to specialize in the right sector and in the right firm. And, we could justly add, in case of financial market executives, that he happened to make the right bets, atleast till date.

Much the same underlying logic can be applied to analyzing the fairness and merits of remuneration in several fields, especially where it is disproportionately higher than the norm in similarly placed occupations. The wage-premium due to good luck is too high to be ignored. In this context, as I have blogged earlier, it may be fair to appropriate some of this disproportionate luck by imposing a higher marginal tax rate on those at the top of the income ladder.

Matt Yglesias too feels that large parts of the economy is becoming more Ricardian with higher resource rents.

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