Reward structures and the allocation of talent

Abstract

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. 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 endogenously determined. The same externality can also lead to the existence of multiple equilibria, each with different reward structures. In a dynamic setting, allocations of past generations as well as expectations of future allocations influence current rewards and the society may get trapped in a 'rent-seeking' steady state equilibrium. The paper also discusses how the non-pecuniary reward structure can be influenced by equilibrium selection and a historical example that suggests the presence of a causal link from the allocation of talent to non-pecuniary rewards. © 1995.