Winner Take all Society

Is it possible that economic life is increasing & becoming a giant tournament-the civilian equivalent of an ravel Ask yourself what all the following have in common: best-sellers, patents, Olympic & Medallion supermodels, victorious lawsuits, Nobel Prize winners, and presidents of the United States. They are all outcomes of Americanizations in which the payoffs are decennial primarily by rel Arm merit rather than absolute merit. There is only one & Old medalist in the 4()0. meter dash, only one winner a lawsuit, and only one book at the top of the best-seller list. Compare such situations with factory woken, whose earnings are determined by ab Dice marginal productivity rather than relative marginal productivity model Claudia Schrieffer is reported to have earned $10.5 million in 1998, while most models make no thin &-Bestseller authors stepchildren King or Dannie Steel are paid up to $60 million for the rights to their books, while surveys indicate that the average writer makes not mow, more than the minimum wage.

Comedian jerky Seinfeld is reported to have earned almost $300 minion In 1998. By contrast, In a recent year, only one-tenth of the members of the tors’ Guild were actually paid for appearing in films, while hopefuls kept the wolf from the door with activities such as driving taxis and waiting on tables. Figure 11-8 shows the winner-take-a11 pme. Lucky or talented Winner has a powerful Vincent..e to participate in the winner-take-all tournament; she ultimately prevails and ge~ an income of $300,000. Runner-Up has the choice of working in an absolute-return industry like manufacturing or joining the tournament in entertainment, athletics, or law. If Runner-Up thinks he has an even chance of prevailing, he enters the race because he estimates that his expected earnings are $100,000 in winner-take-all industries and $50,000 in conventional occupations.

The outcome is the “overcrowded” equilibrium at the lower right, where both people enter the tournament. National income is higher here than in the dull equilibrium, where there are no exciting contests, but lower than in the efficient outcome, where Runner-Up does not enter the contest. An inefficient winner-take-all equilibrium generates the highest inequality of earnings of all outcomes.  A fascinating study by Robert Frank and Philip Cook explores the consequences of what they call a “winner The following quote suggests how game theory has illuminated this important part of economic life:Whereas free maintain that lead to socially efficient results, our claim Is that winner-take-all markets attract too many contestants. result in inefficient patterns 01 .consumption and investment, and often degrade our The explosion of top salaries has summed largely from !he Vowing 01 winner markets. 2 Frank and Cook argue the need for “positional arms control” (such as reforming the legal system) and progressive taxes on consumption as a WIy of reducing the waste from excessive competition for large prizes in entertainment, athletics, and business.

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