ABSTRACT
This chapter analyses the forces that have caused the incomes of professional athletes to reach such levels. This analysis will also place the earnings of professional athletes in perspective and show that, in some cases, professional athletes are underpaid for what they do. The chapter explores the basic model of wage determination in labour markets, and see how athletes' investment in skills affects their pay. It explains why the rewards to professional athletes are often highly skewed, with a few superstars making huge sums while most others make much less. The chapter also explores how providing incentives to exert effort can sometimes backfire. It discusses the sides of the labour market. On the supply side, individual players offer their services to professional sports teams in order to maximize their utility. The distribution of income in professional sports is highly skewed toward those with the most talent. Tournament organizers and teams provide disproportionate rewards to get players to provide more effort.
