TY - JOUR
T1 - To each according to . . . ? Markets, tournaments, and the matching problem with borrowing constraints
AU - Fernández, Raquel
AU - Galí, Jordi
N1 - Funding Information:
Acknowledgements. We are grateful to Jonathan Portes for very helpful suggestions and to Meg Meyer for bringing the Levy-Paroush result to our attention. We also thank an anonymous referee and participants at ESSET in Gerzensee and at seminars at University of Pennsylvania, UCLA, Indiana, LSE, Columbia, Pompeu Fabra, Maryland, IMF, Minneapolis Fed. and NYU for helpful comments, and the C.V. Starr Center for Applied Economics for financial support. The first author is also grateful for support from NSF grant SBR-9618886 and the second author for support from a DGTCYT grant (PB93-0388).
PY - 1999/10
Y1 - 1999/10
N2 - We compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints. The economy consists of a continuum of individuals who differ in their initial wealth and ability level. These must be assigned to a continuum of investment opportunities or inputs of different productivity. With perfect capital markets matching is efficient under both mechanisms. Markets, however, generate higher aggregate consumption because of the waste associated with the production of signals under tournaments. When borrowing constraints are present, tournaments dominate markets in terms of matching efficiency and, for sufficiently powerful signalling technologies, also in terms of aggregate consumption.
AB - We compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints. The economy consists of a continuum of individuals who differ in their initial wealth and ability level. These must be assigned to a continuum of investment opportunities or inputs of different productivity. With perfect capital markets matching is efficient under both mechanisms. Markets, however, generate higher aggregate consumption because of the waste associated with the production of signals under tournaments. When borrowing constraints are present, tournaments dominate markets in terms of matching efficiency and, for sufficiently powerful signalling technologies, also in terms of aggregate consumption.
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U2 - 10.1111/1467-937X.00109
DO - 10.1111/1467-937X.00109
M3 - Article
AN - SCOPUS:0013326537
SN - 0034-6527
VL - 66
SP - 799
EP - 824
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 4
ER -