Is everything relative? A survey of the theory of matching tournaments

Abstract

This paper surveys the theory of matching tournaments, and shows how they can be used to understand how the social environment influences economic decision making. Matching tournaments are games in which players choose efforts or investments before entering a matching market in which attractiveness depends on these investments. This results in rat-race-like competition even in large populations, inducing a concern for relative position and resulting in higher effort than in the absence of competition. However, when both sides of the market invest, the result surprisingly can be socially efficient. Applications and extensions are discussed.