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To Each According To...? Markets, Tournaments, and the Matching Problem with Borrowing Constraints

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Raquel Fernandez
Jordi Gali

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Abstract

We 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 signaling technologies, also in terms of aggregate consumption.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5930.

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Date of creation: Feb 1997
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Handle: RePEc:nbr:nberwo:5930

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Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  7. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April. [Downloadable!] (restricted)
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  2. Ed Hopkins & Tatiana Kornienko, 2006. "Which Inequality? The Inequality of Resources Versus the Inequality of Rewards," Levine's Bibliography 784828000000000621, UCLA Department of Economics. [Downloadable!]
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  7. Ângela Albernaz & Francisco H. G. Ferreira & Creso Franco, 2002. "Qualidade e eqüidade na educação fundamental brasileira," Textos para discussão 455, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  8. Bratti, Massimiliano & Checchi, Daniele & de Blasio, Guido, 2008. "Does the Expansion of Higher Education Increase the Equality of Educational Opportunities? Evidence from Italy," IZA Discussion Papers 3361, Institute for the Study of Labor (IZA). [Downloadable!]
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  13. Joan Esteban & Debraj Ray, 2006. "Inequality, Lobbying, and Resource Allocation," American Economic Review, American Economic Association, vol. 96(1), pages 257-279, March. [Downloadable!]
  14. Che, Yeon-Koo & Gale, Ian, 2006. "Market versus Non-Market Assignment of Initial Ownership," MPRA Paper 6095, University Library of Munich, Germany, revised 30 May 2006. [Downloadable!]
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  15. Fernandez, R., 1998. "Education and Borrowing Constraints: Tests vs Prices," Working Papers 98-17, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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