Abstract:
This paper identifies the condition leading to a progressive salary situation wherein the elasticity of compensation with
respect to ability is greater than unity, i.e., a small percentage advantage in ability results in a disproportional increase in
compensation. This analysis also helps explain the “superstar phenomenon” made famous by Rosen (1981). Two as sumptions are made. The first is that there is a generalized Cobb-Douglas type of production function wherein different
hierarchies of employees of different abilities are viewed as distinct inputs. The second is that the distribution of ability
is bell-shaped or approximately normally distributed, and can be approximated by a Poisson distribution. The model is
applied using average outgoing salaries of MBA students from different universities compared to their average test
scores
