R. Fernandez et J. Gali, To each according to ... ? Markets, tournaments, and the matching problem with borrowing constraints, REV ECON S, 66(4), 1999, pp. 799-824
We compare the performance of markets and tournaments as allocative mechani
sms in an economy with burrowing constraints. The economy consists of a con
tinuum of individuals who differ in their initial wealth and ability level.
These must be assigned to a continuum of investment opportunities or input
s of different productivity. With perfect capital markets matching is effic
ient under both mechanisms. Markets, however, generate higher aggregate con
sumption because of the waste associated with the production of signals und
er tournaments. When borrowing constraints are present, tournaments dominat
e markets in terms of matching efficiency and, for sufficiently powerful si
gnalling technologies, also in terms of aggregate consumption.