Wojtek writes: >Is executive salary, or a part of it, rent from an economic point of view? >And if so, how can the rent component in that salary be determined? > >I'm asking this question because a mainstream economist I'm working with >argued that exec's salary can actually reflect the exec's worth (i.e. what >he, rarely she, produces). Since the productivity of an exec (or for that >matter, any white collar worker) cannot be directly measured -- how can such >a position be intelligently rebutted? These are two separate questions: that is, an executive could be paid an amount equal to something that might plausibly be construed as his or her marginal product, and yet still be earning (lots of) economic rent. I'd say that conditions in executive labor markets, particular in the US, are such that many or most executives earn economic rent, whether or not they're paid the value of their marginal product. Details: 1) By its nature, executive labor is more or less a fixed-coefficient input in the production process. This is especially the case for _chief_ executive officers---once you've got 1 of them, the value of any more plunges dramatically. An immediate consequence is that "marginal productivity" of the executive has to be interpreted with care, since beyond a given point (in the case of CEOs, that point presumably = one person) the relevant derivative simply doesn't exist. Therefore "marginal productivity" has to be understood in a discrete sense, as the difference in (discounted average) firm profits with and without the services of a given CEO. Whether or not a given CEO receives this amount depends primarily on the long-run elasticity of demand for CEO services--which depends in turn on the long-run supply elasticity of firms, or less vaguely, stockholders and other firm types of firm owners. CEOs are guaranteed to receive their full marginal product, defined in the above sense, only if this elasticity is infinite. In this case Keynes is probably right--in the "long run" required for this prediction to hold, we're all dead. 2) But nothing in (1) determines whether executives earn economic rents, since the latter has to do with conditions of market supply *relative to* market demand. Executives will earn economic rents even given "price-taking" behavior if they are on the "short side" of the market--i.e., the supply of executives hits its limit before the demand for executive services does. Alternatively, and maybe more plausibly, executives will receive economic rent if they are difficult for firms to find and/or replace, and consequently enjoy bargaining power in their negotiations with firms that hire them. Thus, to guarantee that executives receive no economic rent, you'd have to be sure that a) they enjoy no bargaining power vis-a-vis firms, and b) the (long-run) supply of executives is infinitely elastic at the zero-rent wage (and all CEOs are alike, so that all face zero rents if any one does). So the claim that executives do not typically receive rents depends on pretty strenuous conditions. How to prove that they in fact receive rents? Ask first who has proved that they receive _no_ rents--I'd love to see the study claiming to do this. As a first pass, the evidence that executive pay _does not_ vary predictably with firm profitability argues against the relevance of marginal productivity theory in markets for executive labor power, since the marginal product of an executive, especially the chief executive, is best thought of in terms of differences in profitability flowing from the presence of that input. To address the issue of economic rent directly, you could provide evidence for the existence of mobility barriers in the market for executive labor power, but this is easier said than done. You might look at Dickens and Lang's articles supporting "dual labor market" theory for clues on how to proceed on this issue. In solidarity, Gil Skillman
