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

Résumé

The misallocation of talent between routine production versus innovation activities is shown to have a first-order impact on the welfare and growth prospects of an economy. Surname level empirical analysis combining patent and inventor micro-data with census data reveals new stylized facts: (1) People from richer backgrounds are more likely to become inventors; but those from more educated backgrounds are not. (2) People from more educated backgrounds become more prolific inventors; but those from richer backgrounds exhibit no such aptitude. Motivated by this discrepancy, a heterogeneous agents model with production and innovation sectors is developed. Individuals compete against each other for scarce inventor training in a tournament setting. Those from richer families 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 via indirect inference. A thought experiment in which the credentialing spending channel is shut down reveals that the rate of innovation can be increased by 10% of its value. Optimal progressive bequest taxes serve to increase social welfare by 6.20% in consumption equivalent terms.