Tuesday, July 17, 2018

econlife - Why Superstar Salaries Are So High by Elaine Schwartz

During a Sunday evening, in a brief news release, we learned that LeBron James was going to the LA Lakers. His price was $154 million.

Why so much money?

Superstar Qualities

Two sports economists tell us that NBA (National Basketball Association) superstars have certain characteristics. As a top draft pick, the player needs to have been touted by the league from the beginning. Reflected by countless achievements, the person has to be considered a premier talent. And looking at a career, that excellence should have lasted for many years.

On the table below, you can see the credentials of five NBA superstars. (VORP is Value Over Replacement Player):


Large Audience

A second ingredient in the recipe for a superstar salary is the size of your audience. To get more of a feel for what that means, let’s start with the nineteenth century diva economists like to cite. As the Luciano Pavarotti of her era, Elizabeth Billington was a superstar. Yes, she earned a whopping £10,000 to £15,000 in 1801. But still, her income was limited by the size of her audience at Covent Garden or Drury Lane.

Not LeBron’s.

Through TV and radio, online and at the stadium, his audience and its positive externalities are almost unlimited. Modern technology has vastly inflated what big stars can earn.

Talent and/or Popularity

Finally, we can contemplate a debate between two academics. One says the key to the superstar salary is talent while the other says it is a combination of talent and popularity. After all, you can have people with equal talent but then popularity kicks in to create the superstar status.

Discussing each side, one paper suggest it depends on the person. Larry Bird, they say, is a superstar because of his talent. But with LeBron, they say his popularity helped to fuel his salary.

Our Bottom Line: Supply and Demand

So, with limited supply and the huge (adulatory) audience that technology facilitates, 21st century markets for superstar basketball players generate salaries as high as a four-year deal for $154 million.

My sources and more: First, thanks to Sophie B. for reminding me that it was time to return to superstar salaries. Naturally, our first stop was the NY Times discussion of James’s salary and his accomplishments. Then, although this paper from the Peterson Institute provides insight, the classic study has been around since 1981. And finally, for the best detail and analysis, I suggest this recent paper on superstars and attendance and an interesting rationale for not calling Charles Barkely, Shaquille O’Neal, Kareem Abdul-Jabbar, or Kobe Bryant superstars.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.