The Korean Journal of Economic Studies
Presidential Address: Economics about Losers
In Ho Lee (Seoul National University)Year 2021Vol. 69No. 2
This paper analyzes the effect of compensation for losers on competition in terms of providing incentives to market participants. We consider a model in which the relative difference between the rewards received in case of success and failure in competition determines the size of investment in technological innovation. The difference in rewards between winners and losers in competition plays an interesting dual role. While the difference in rewards between winners and losers provides incentives to work hard, if the difference is too large, it prevents them from participating in the competition in the first place. To encourage participation in competition, we suggest increasing the overall level of compensation while maintaining the relative loss suffered by losers.