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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.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:5930
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    Cited by:

    1. Murat F. Iyigun & Andrew T. Levin, 2003. "What Determines Public Support for Affirmative Action?," Southern Economic Journal, Southern Economic Association, vol. 69(3), pages 612-627, January.
    2. Diana Loubaki, 2012. "On The Mechanics Of The Brain-Drain Reduction In Poorest Developing Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 37(3), pages 75-106, September.
    3. Patrick Legros & Andrew F. Newman, 2002. "Monotone Matching in Perfect and Imperfect Worlds," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 925-942.
    4. Raquel Fernandez, 1998. "Education and Borrowing Constraints: Tests vs. Prices," NBER Working Papers 6588, National Bureau of Economic Research, Inc.

    More about this item

    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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