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Title: Does the Cream Always Rise to the Top? The Misallocation of Talent in Innovation

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: The misallocation of talent between routine production versus innovation activities has a first-order impact on the welfare and growth prospects of an economy. Surname level empirical analysis employing micro-data on patents and inventors in the U.S. between 1975-2008 combined with census data from 1930 reveals new stylized facts: (i) people with richer surnames have a higher probability of becoming an inventor, however (ii) people with more educated surnames become more prolific inventors. Motivated by this discrepancy, a heterogeneous agents model with production and innovation sectors is developed, where individuals can become inventors even if they are of mediocre talent by excessive spending on credentialing. This is individually rational but socially inefficient. The model is calibrated to match the new stylized facts and data moments from the U.S. economy, and is then used to measure the magnitude of the misallocation of talent in innovation. A thought experiment in which the credentialing spending channel is shut down reveals that the aggregate growth rate of the economy can be increased by 10% of its value through a reduction of the misallocation. Socially optimal progressive bequest taxes that alleviate the misallocation are calculated, which serve to increase the growth rate of the economy to 2.05% while increasing social welfare by 6.20% in consumption equivalent terms.

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Authors: Celik, Murat Alp

Publisher: University of Pennsylvania, Department of Economics

Data Collections: IPUMS USA

Topics: Other

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