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Reward Structures and the Allocation of Talent

  • Daron Acemoglu

As relative rewards that different professions receive are a key factor in the allocation of talent, what determines the reward structure of a society is an important question. In order to deal with this question, this paper develops an equilibrium model of the allocation of talent between productive and unproductive activities (such as rent-seeking). The existence of rent-seeking creates a negative externality on productive agents and implies that relative rewards are partly endogenous. The same externality can also lead to multiple equilibria, each with different relative rewards. When we consider a dynamic setting, current rewards are seen to be influenced by past allocations as well as expectations of future allocations and the society may get trapped in "rent-seeking" steady state equilibrium. The paper also discusses how the non-pecuniary reward structure can be influenced by equilibrium selection and suggest some historical examples which indicate the presence of a causal link from the allocation of talent to pecuniary and non-pecuniary rewards.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0143.

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Date of creation: May 1993
Date of revision:
Handle: RePEc:cep:cepdps:dp0143
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  1. Landes, David S., 1949. "French Entrepreneurship and Industrial Growth in the Nineteenth Century," The Journal of Economic History, Cambridge University Press, vol. 9(01), pages 45-61, May.
  2. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
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  5. repec:oup:qjecon:v:106:y:1991:i:2:p:503-30 is not listed on IDEAS
  6. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  7. Tirole, Jean, 1994. ""A Theory of Collective Reputations" with Applications to the Persistence of Corruption and to Firm Quality," IDEI Working Papers 38, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  9. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
  11. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October.
  12. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
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