Jeff Bezos and His Economic Rent

In class, we talked a lot about economic rent, or returns greater than opportunity costs. Economic rent is a very valuable thing, and because of the existence of this rent, firms are incentivized to secure it, which leads to resources being diverted from their most highly valued uses. An example of this may be the government auctioning off the rights to operate a local monopoly to the highest bidder. Rents are easy to see here in the situation of a monopoly. When we draw the graph, we see a rectangle which is a transfer from the consumers to the producers (shown in green in the picture below). Firms want to capture this economic rent, so they will use resources to do so.

The above scenario addresses economic rent in a non-competitive market, but what about economic rent in a competitive market? Does that exist? According to my economic inequality professor, it does! In my economic inequality course, we recently talked about how CEOs of major corporations earn economic rent in the competitive market. In this course we defined rent the same way: pay above opportunity cost. In this paper by Gabaix and Landier, they attribute the ability of CEOs to capture economic rent to what they call the "superstar effect," or the effect that new technology has in expanding the reach of the most talented individuals in their field, thereby increasing their marginal product. In their model, they use an "assignment model" where the most talented CEO will be matched with the biggest firm because the firm's revenue is a function of firm size and talent (with increasing returns to talent at an increasing rate). Thus, the biggest firm will pay for the best CEO because that little bit of extra talent (as compared to the second-best CEO) matters more for them (their revenue) than for any other firm. This means that pay to CEOs is increasing as a function of talent. Thus, they explain that CEOs are making so much money because their marginal products have been increasing as a result of better technology, and firms are willing to pay so much for them because of this. Economic rent enters the picture because CEOs are making so much money (likely way more than they would need to be convinced to get up and do their job), that their next best alternative to being a CEO (or their opportunity cost) is much lower than their pay. Thus, these "superstar" CEOs, like Jeff Bezos, are making economic rent in a competitive market.