Credit constraints, competition, and meritocracy

This paper studies a simple model of the talent-ownership mismatch-or failure of meritocracy-brought about by credit market imperfections that prevent the transfer of control over productive assets from the untalented rich to the talented poor. We present two main insights. First, there may be multiple equilibria in the degree of meritocracy. Second, the severity of the misallocation of talent depends on the degree of concentration on the good market. Hence, reforms that improve the workings of the credit market(such as better enforcement of contracts), and reforms that reduce concentration (such as deregulation) are to some degree substitutes in bringing about greater meritocracy. We also examine which reform strategy is more likely to enhance efficiency without violating political constraints.