Winner-Take-All Markets: Easing the Case for Progressive Taxation

Abstract

Copyright © 1999 by Martin J. McMahon, Jr. and Alice G. Abreu.

Everybody loves a winner, and the market often agrees, providing spectacular rewards for those who win. While the winners win big, everyone else is left behind, reaping rewards that bear little relationship to how close they were to winning or to the magnitude of the difference between their talents and those of the winners.
The winner-take-all phenomenon, long the hallmark of the sports and entertainment markets, has spread throughout the U.S. economy over the last two decades. As more markets operate like the entertainment market, scholars have begun to analyze the ways in which such markets suggest a need to rethink established conclusions and policies. The recent work of two economists, Robert H. Frank and Phillip J. Cook, provides a good springboard for this analysis. In The Winner-Take-All Society, Frank and Cook describe how an increasing number of labor markets now operate in ways that depart significantly from the classical economically efficient model. In these markets, a large number of individuals compete for a relatively small number of positions that offer the possibility for financial rewards far exceeding those that await less successful competitors. As in the entertainment industry, where the difference between the compensation received by the star and that received by her understudy is almost always far more than proportional to the differences in their talent, these steadily growing markets display what is essentially a winner-take-all paradigm.