Reward structures and the allocation of talent

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. In order to deal with this 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 partly endogenous. The same externality can also lead to multiple equilibria, each with different relative rewards. When we consider a dynamic setting, current rewards are seen to be influenced by past allocations as well as expectations of future allocations and the society may get trapped in "rent-seeking" steady state equilibrium. The paper also discusses how the non-pecuniary reward structure can be influenced by equilibrium selection and suggest some historical examples which indicate the presence of a causal link from the allocation of talent to pecuniary and non-pecuniary rewards.