Working Paper: CEPR ID: DP15318
Authors: Ufuk Akcigit; Jeremy Pearce; Marta Prato
Abstract: How do innovation and education policy affect individual career choice and aggregate productivity? This paper analyzes the various layers that connect R&D subsidies and higher education policy to productivity growth. We put the development of scarce talent and career choice at the center of a new endogenous growth framework with individual-level heterogeneity in talent, frictions, and preferences. We link the model to micro-level data from Denmark and uncover a host of facts about the links between talent, higher education, and innovation. We use these facts to calibrate the model and study counterfactual policy exercises. We find that R&D subsidies, while less effective than standard models, can be strengthened when combined with higher education policy that alleviates financial frictions for talented youth. Education and innovation policies not only alleviate different frictions, but also impact innovation at different time horizons. Education policy is also more effective in societies with high income inequality.
Keywords: R&D policy; education policy; inequality; innovation; IQ; endogenous growth
JEL Codes: O31; O38; O47; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D subsidies (O38) | productivity growth (O49) |
| education policy (I28) | allocation of talent into research roles (D29) |
| financial frictions (G19) | allocation of talent into research roles (D29) |
| R&D subsidies (O38) | innovation (O35) |
| education policy (I28) | innovation (O35) |
| educational subsidies (I22) | likelihood of talented individuals entering research roles (D29) |
| income inequality (D31) | effectiveness of education policy in stimulating innovation (O38) |
| increasing PhD slots (I23) | quality of innovation (L15) |