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Joseph Schumpeter Lecture, EEA Annual Congress 2017: Do tax cuts produce more Einsteins? The impacts of financial incentives vs. exposure to innovation on the supply of inventors

Bell, Alex, Chetty, Raj, Jaravel, Xavier, Petkova, Neviana and Van Reenen, John (2019) Joseph Schumpeter Lecture, EEA Annual Congress 2017: Do tax cuts produce more Einsteins? The impacts of financial incentives vs. exposure to innovation on the supply of inventors. Journal of the European Economic Association, 17 (3). 651 - 677. ISSN 1542-4766

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Identification Number: 10.1093/jeea/jvz013

Abstract

Many countries provide financial incentives to spur innovation, ranging from tax incentives to research and development grants. In this paper, we study how such financial incentives affect individuals’ decisions to pursue careers in innovation. We first present empirical evidence on inventors’ career trajectories and income distributions using deidentified data on 1.2 million inventors from patent records linked to tax records in the United States. We find that the private returns to innovation are extremely skewed—with the top 1% of inventors collecting more than 22% of total inventors’ income—and are highly correlated with their social impact, as measured by citations. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. We then build a stylized model of inventor career choice that matches these facts as well as recent evidence that childhood exposure to innovation plays a critical role in determining whether individuals become inventors. The model predicts that financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they only affect individuals who are exposed to innovation and have essentially no impact on the decisions of star inventors, who matter most for aggregate innovation. Importantly, these results hold regardless of whether the private returns to innovation are fully known at the time of career choice or are fully stochastic. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline. Although we do not present direct evidence supporting these model-based predictions, our results call for a more careful assessment of the impacts of financial incentives and a greater focus on alternative policies to increase the supply of inventors.

Item Type: Article
Official URL: https://academic.oup.com/jeea
Additional Information: © 2019 The Authors
Divisions: Economics
Subjects: H Social Sciences > HD Industries. Land use. Labor
T Technology > T Technology (General)
H Social Sciences > HJ Public Finance
JEL classification: O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O32 - Management of Technological Innovation and R&D
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O33 - Technological Change: Choices and Consequences; Diffusion Processes
Date Deposited: 05 Jun 2020 15:18
Last Modified: 27 Jul 2020 18:03
URI: http://eprints.lse.ac.uk/id/eprint/105019

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