Amongst the extensive coverage of the Olympic Games from Rio, the start of the Football season in Europe has slipped under the radar. Michael Cameron’s blog post on footballer salaries was timely and in particular his discussion around the difference between the superstar and tournament effects.
Superstar effects – this is where a player is rewarded with a higher salary than his/her team mates for generating higher revenues for their club.
Tournament effects – this is the situation where wage differences are based NOT on marginal productivity but instead upon relative differences between the individuals. Ultimately each player only needs to be a little bit better than the second best player in order to ‘win’ the tournament.
Michael Cameron looks at the salaries of Ronaldo and Messi and states that it is unlikely that either of these players would generate more than twice as much value as the others on the graph below. Therefore the difference in salaries must be generated by something other than just superstar effects; that is, tournament effects.
In contrast, the difference in average salaries in England between Premier League footballers (£1.7 million) and League Two footballers (£40,350) is likely to be a mix of superstar effects (Premier League footballers generate more value for their employers than League Two footballers) and tournament effects (there’s a limited number of places for Premier League footballers, so slightly worse players end up in lower divisions paying less). See graph below.
One last point: It’s been argued (I saw this argument first in Tim Harford’s book The Logic of Life) that the size of the ‘prize’ for a tournament will be larger the more luck is involved. That is, if the difference between the tournament ‘winner’ and the others is mostly luck, the size of the bonus for working hard to win the tournament must be high in order to sufficiently incentivise the worker to work hard. So, if you buy that the difference in the graph above is mostly a tournament effect, does that mean that the earnings difference between Ronaldo and Messi at the top, and Neymar in third, is mostly down to luck?
Source: Michael Cameron