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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

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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Bibliographic Info

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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Publication status: published as Review of Economic Studies, Vol. 66, no. 4 (1999): 799-824.
Handle: RePEc:nbr:nberwo:5930

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  1. Roland Benabou, 1996. "Unequal Societies," NBER Working Papers 5583, National Bureau of Economic Research, Inc.
  2. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
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  8. Fernandez, Raquel & Rogerson, Richard, 1998. "Public Education and Income Distribution: A Dynamic Quantitative Evaluation of Education-Finance Reform," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 813-33, September.
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