Human Capital Dispersion and Incentives to Innovate

Do policies that alter the allocation of human capital across individuals affect the innovation capacity of an economy? To answer this question I extend Romer’s growth model to allow for individual heterogeneity. I find that the value of an invention rises with equality. If skills and talents are evenly distributed, inventions are more widely adopted in production and users are willing to bid a higher price. Therefore more inequality is associated with a larger share of the population employed in the business of invention. But, somehow surprisingly, the analysis suggests that although an equal society values inventions more than an unequal one, it may produce fewer of them, or, equivalently, generates inventions of a lower quality. A calibration of the model suggests a weak, but positive, relationship between the rate of innovation and inequality. Finally, in a two-country world, in which ideas, individuals, and capital circulate without restrictions, I find that the unequal economy tends to specialize into the business of innovation. The main implication of the analysis is that an observed difference in the innovation rate between two countries with similar levels of education can hardly be attributed to variations in domestic human capital policies.