From Greg Mankiw: Gabaix on CEO Pay
In Xavier's view, CEO's are earning the value of their marginal product. Top CEOs are paid high salaries because they are directing the fortunes of large enterprises, and even a small amount of extra talent is worth a lot.
Some people on the left have suggested that high CEO pay is a reflection of poor corporate governance, which allows CEOs to, in effect, steal value from shareholders. Xavier tests for this possibility using a measure of corporate governance and concludes, "Poor governance does increase CEO pay, but the effect seems small."
Another aspect of Xavier's work, however, should appeal to those on the left: In his model, high CEO salaries are pure economic rents. CEOs are paid what they are worth to the company, because they are extraordinarily talented, but the supply of talent is inelastic, and the allocation of talent would not be affected if everyone faced high tax rates.
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