Institutions and the Allocation of Talent

1. TimurNatkhov, Leonid Polishchuk Institutions and the Allocation of Talent Higher School of Economics, Moscow

2. Motivation: Selection of Subject Areas by Russian University Applicants

3. Most Able Applicants Choose Law

4. Hypotheses • Institutions affect returns to human capital in various economic activities and hence occupational choice • Strong institutions reward productive economic activities and create incentives for value-creating Schumpeterian entrepreneurship • Weak institutions reward rent-seeking which draws talents and entrepreneurial energy away from wealth creation towards redistribution Allocation of talent Economic development Institutions

5. Antecedents: William Baumol (1990) Institutions affect allocation of talent between productive and unproductive activities «Entrepreneurs are always with us and always play some substantial role. How they act at a given time and place depends heavily on the rules of the game – the reward structure in the economy – that happen to prevail» • Ancient Rome • Medieval China • Dark Ages in Europe • Later Middle Ages

6. Antecedents: K.Murphy, A.Shleifer, R.Vishny (1991) • Economic growth is driven by energy and innovations produced by a relatively small group of most talented individuals • Hence the choice by such individuals between production and rent-seeking is critically important for economic development • Excessive enrollment of best and brightest in law at the expense of sciences and engineering adversely related to growth rates

7. Empirical strategy • Regression model • (Un)productive activities – share of young talents in country ipursuing education which equips for (un) productive activities • Institutional quality – quality of institutions in country i • X – control variables • e – random error • Coefficient reflects the impact of institutions on the allocation of talent

8. Data • UNESCO database on graduates by 28 fields of study in 100countries • Law • Science • Engineering • Governance Matters Indicators by the World Bank • Rule of Law • Control for Corruption • Control variables

9. Institutions and students’ choices

10. Quality of institutions and enrollment in law schools

11. Lawlessness increases the appeal of legal profession

12. Quality of institutions and enrollment in sciences

13. Rule of Law increases the appeal of sciences

14. Law vs. Sciences and quality of institutions

15. Net attractiveness of law and the quality of institutions

16. Robustness checks

17. Institutions and settlers mortality (Acemoglu, Johnson, Robinson 2001)

18. 2SLS for former colonies with settlers mortality as instrument

19. The case of transition economies

20. Successful reforms increase relative attractiveness of sciences over law

21. Enrollment trends: The tale of two neighbors

22. Conclusions • Inefficient state, lack of the rule of law and poor protection of property rights increase the relative attractiveness law and public administration as areas of study for university students • Strong institutions increase the relative attractiveness of sciences and engineering as career choices for young people • Allocation of talent is a transmission mechanism between institutions and growth

23. Institutions, Human Capital, and the Allocation Talent • According to the model, more talented individuals are more sensitive to the quality of institutions • With weak institutions, the share of law students among more gifted young people should be higher, then for the whole cohort • With strong institutions, the share of science students among more gifted young people should be higher, then for the whole cohort

24. Consistency check: legal origins • Legal origins have strong impact on contemporary institutions: • Property rights protection (La Porta, Shleifer, et al., 1997) • Contract enforcement (La Porta, Shleifer, et al., 1998) • Quality of governance (La Porta, Shleifer, et al., 1999) • Control of corruption (La Porta, Shleifer, et al., 1999)

25. 2SLS model

26. Estimation results

27. Direct and indirect impact of legal origins • Legal origins are NOT valid instruments: they directly affect the legal profession • Common law system is more lawyers-intensive than the civil law one due to differences in administration of justice (adversarial vs. inquisitorial approaches) • However the indirect effect of legal origins (trough the quality of institutions) on the popularity of legal profession prevails over the direct one

28. Human capital, institutions, and allocation of talent • Data: quality of education indexes PISA and TIMMS for 60 countries

29. Strong human capital and weak institutions

30. Institutions and economic growth • Institutions are pivotal for development

31. Allocation of talent as a missing link between institutions and growth

32. Single-country analysis – quality of institutions and preference to law in Russian regions

33. Dream Employers for Russian youths

34. Dream Employers for European Youths

35. Lawyers crowd out scientists and engineers

36. A model

37. Selection of activity

38. Equilibrium

39. Impact of institutions on the allocation of effort

40. Higher talents are more sensitive to institutions

41. Strong institutions: А > 0 θ Rent-seeking Production w Weak institutions: А < 0 θ Production Rent-seeking w