Superstars and mediocrities: a solution based on personal income taxation

The markets for talent often produce large income inequality and
therefore raise political attention. While such inequality can be due
to superstar dynamics or factor complementarities, Tervio (\Superstars
and Mediocrities: Market Failure in The Discovery of Talent",
the Review of Economic Studies, 2009) rst proposed a market failure
that was previously unknown to the literature, pointing to long-term
contracts as a solution. I extend the model in Tervio (2009) to include
personal income tax policy reforms and demonstrate that tax
design can be employed as a solution to the market failure when longterm
contracts are unfeasible. With small enough entry payments that
novice workers would sustain to compensate employers for the cost of
learning, both a progressive tax and a tax incentive on entry wages
are found e ective. The tax incentive on entry wages, though, can be
used even with very large deductible entry payments and with overall
negative net entry wages.

Authors:

D'ANDRIA Diego