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

The misallocation of talent in innovation - "missing Einsteins" - has a first-order impact on growth and welfare. Surname-level empirical analysis combining inventor and census micro-data reveals people from richer backgrounds are more likely to become inventors, but those from high-education backgrounds become more prolific inventors. Motivated by this discrepancy, an endogenous growth model with financial frictions on the household side is developed. Individuals compete for scarce inventor training. The rich can become inventors even if mediocre through excessive credentialing spending. Shutting down cre-dentialing spending raises innovation, growth, welfare, and inequality. Optimal progressive bequest taxes increase growth and welfare, but reduce inequality.Crown Copyright (c) 2022 Published by Elsevier B.V. All rights reserved.