DP15318 Tapping into Talent: Coupling Education and Innovation Policies for Economic Growth

Author(s): Ufuk Akcigit, Jeremy Pearce, Marta Prato
Publication Date: September 2020
Keyword(s): Education Policy, Endogenous Growth, inequality, Innovation, IQ, R&D policy
JEL(s): J24, O31, O38, O47
Programme Areas: Labour Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15318

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.