This past week, my ECONS102 class covered labour markets. Part of that topic is a discussion of superstar and tournament effects, which are explanations for why, within a particular labour market, some workers get paid a lot while most workers get paid very little. As an example, in the labour market for actors, the top actors get paid a lot, while the 'average' actor barely earns enough to get by (or doesn't earn enough to get by, which is why so many aspiring actors work as waitstaff at restaurants).
Superstar effects arise when the worker (the superstar) earns a lot of value for their employer. Labour markets with superstar effects generally have two features:
- Scale – the top performers can satisfy the demand of a lot of consumers (which is more likely when the output is non-rival). That generates a very high value (technically, the value of the marginal product of labour, or VMPL) for the employer, with little additional cost; and
- Non-substitutability – the particular job (or skills, or ‘style’) performed by the top performer is unique, and cannot be easily replicated by the ‘average’ worker.
Because of the high value created by the superstar, and non-substitutability, employers compete fiercely over these top performers, and so they will receive a very high wage. Movie stars provide a good example of the superstar effect in action.
In some labour markets, workers are rewarded for their relative (rather than absolute) performance. In these markets, workers essentially compete for a ‘prize’ – maybe a raise or a promotion, and they only need to be a little bit better than the second-best person in order to ‘win’ the prize. These labour markets are said to exhibit tournament effects. In these markets, the extra pay for the top workers arises not because they create more value for the employer, but as a way of incentivising workers to work hard (in order to try and 'win' the tournament). Good examples of tournament effects in action are the pay for CEOs, sports stars, or hedge fund managers.
How can we distinguish between superstar and tournament effects? Some markets actually have both, like the market for sports stars. However, for the high wages to be a superstar effect, the worker must generate much more value for the employer than alternative workers do. And that brings me to this recent article by Dominik Schreyer (WHU – Otto Beisheim School of Management) and Carl Singleton (University of Stirling), published in the journal Contemporary Economic Policy (open access).
Schreyer and Singleton look at the impact of Cristiano Ronaldo on the Saudi Pro League, after he was surprisingly signed by the Al Nassr club a few days after the 2022 FIFA World Cup. They note the potential for superstar effects here, specifically:
The Ronaldo signing, and subsequent player moves, could attract international tourists and foreign investments to the country, help market the TV product abroad...
Schreyer and Singleton look at the impact of Cristiano Ronaldo on stadium attendance, as a measure of his positive impact on the league. Their data comes from 240 matches played by 16 different clubs during the 2022–2023 season, noting that Ronaldo made his debut for Al Nassr on January 22 and played in 16 matches over the course of the rest of the season. In their preferred regression specification, Schreyer and Singleton find that:
...the estimated average effect of Ronaldo playing at home is 20% points of capacity, and the average effect of him playing away is 15% points, significantly different from zero at the 10% level (two‐sided test).
Moreover, when they look at whether there was a general impact of Ronaldo joining the league on attendance, they find that:
...the post‐Ronaldo‐playing period of the season 2022–2023 was associated with generally higher attendance demand across all matches, by 3% points of stadium capacity, significantly different from zero at the 10% level (two‐sided test), with a further significant 17% point effect when he played at Al‐Nassr's home.
Schreyer and Singleton conclude that this is evidence in favour of a superstar effect. However, I am not entirely convinced. How much additional value is Ronaldo generating for Al Nassr and the Saudi Pro League? Mean stadium capacity in Schreyer and Singleton's sample is just 26,000. So, an increase of 15-20 percentage points is an increase of 4000-5000 people in attendance at the game. That isn't going to generate anywhere near enough additional revenue to cover Ronaldo's salary of €180 million per year. Even with jersey sales and an increase in advertising or sponsorship revenue, this will not break even for Al Nassr. On the other hand, for Saudi Arabia generally this might be a good deal. Schreyer and Singleton note that:
The Ronaldo signing... [could] legitimize KSA's other foreign sports investments, including the 2021 takeover of Newcastle United FC...
Perhaps those broader benefits are worth more than Ronaldo's salary? Saudi Arabia may value the legitimisation quite highly (hence all the accusations of sportswashing). Still, it seems to me that at least part of Ronaldo's salary is a tournament effect. If Al Nassr had signed Kylian Mbappe instead, I'm sure they would have paid a hefty salary for the privilege. Instead, Mbappe is being paid the comparatively pauper-like salary of €36 million at Real Madrid. That suggests that the next best player earns far less than Ronaldo [*], which is indicative of Ronaldo's salary being a tournament effect.
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[*] We could argue endlessly about who are the top and second-best players. However, choose any from this list of the top-paid footballers, and the argument still holds up.
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