Diamonds are Forever - Labor Contracts
I'm posting a 14-part series of mini-essays on diamonds (but really about the economic point of view). Here's part 11.
Labor Contracts
Speaking of movies, in Diamonds are Forever, the seventh film in the James Bond juggernaut, Sean Connery was paid what was then a record-breaking sum of $1.25 million for his role as the world’s most iconic spy.
Connery’s sum looks paltry now, even adjusted for inflation.
In 2016, Robert Downey Jr. earned a $40 million lump sum to appear in Captain America: Civil War. These enormous lump sums notwithstanding, the biggest box-office paydays often come from actors’ profit-sharing agreements with movie studios. Downey made (at least) an additional $40 million from other aspects of his contract, including profit-sharing. Connery, in Diamonds are Forever, made (roughly) an additional $4 million.
Why are actors sometimes paid lump sums, other times by way of risky profit-sharing, and why so often a mixture of both?
Darlene Chisholm has explored these questions in the Hollywood context. Higher effort levels from actors correlate positively with the box-office bottom line. A problem arises because actors have an incentive to shirk since work isn’t always fun—even for actors. Thus, offering a profit-sharing agreement is one way to discipline actors’ shirking. It gives them a stake in the final product.
Why, then, do studios use any contract other than a profit-sharing agreement for actors and actresses? Hammering out the details of profit-sharing contracts is costly, and a standardized fixed-payment contract saves resources. Studios offer profit-sharing contracts only when constraining shirking is particularly valuable.
Two quick examples illustrate some of the variables influencing this calculus. Big-name actors are more likely to receive share contracts because they have an incentive to coast on the reputation they have already established. Actors are more likely than actresses to receive share contracts.
An instance of hypocritical, Hollywood elites discriminating against women? Hardly.
Some 70% of leads are played by men and incentivizing the lead is of utmost importance. When a woman plays a leading role, she is also more likely to be offered a share contract. (Someone could argue that a disproportionate share of male leads is evidence of discrimination, but I’m not investigating that claim here).
It thus makes sense that a superstar like Connery would have received a share contract, especially for playing one of the most recognizable leading roles of all time.
To alter laborers’ incentives and thus their behavior, change the way they’re paid.