To Each According To...? Markets, Tournaments, and the Matching Problem with Borrowing Constraints
AbstractWe compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints. The model consists of a continuum of individuals who differ in their initial wealth and ability level (e.g. students) and that are to be assigned to a continuum of investment opportunities or inputs of different productivity (e.g. schools of different qualities). With perfect capital markets both mechanisms achieve the efficient allocation, though markets generate higher aggregate consumption because of the waste associated with the production of signals under tournaments. When borrowing constraints are present, however, tournaments dominate markets in terms of aggregate output and, for sufficiently powerful signalling technologies, also in terms of aggregate consumption.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1627.
Date of creation: May 1997
Date of revision:
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Other versions of this item:
- Fernandez, Raquel & Gali, Jordi, 1999. "To Each According to . . . ? Markets, Tournaments, and the Matching Problem with Borrowing Constraints," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 799-824, October.
- Raquel Fernandez & Jordi Gali, 1997. "To Each According To...? Markets, Tournaments, and the Matching Problem with Borrowing Constraints," NBER Working Papers 5930, National Bureau of Economic Research, Inc.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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