Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors

Alex Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova and John van Reenen

No 25493, NBER Working Papers from National Bureau of Economic Research, Inc

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 de-identified data on 1.2 million inventors from patent records linked to tax records in the U.S. 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 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 known at the time of career choice. 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.

JEL-codes: H0 J0 O3 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ino, nep-lab and nep-pbe
Note: EFG LS PE PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://www.nber.org/papers/w25493.pdf (application/pdf)

Related works:
Working Paper: Do tax cuts produce more Einsteins? The impacts of financial incentives vs. exposure to innovation on the supply of inventors (2019)
Working Paper: Do tax cuts produce more Einsteins? The impact of financial incentives vs. exposure to innovation on the supply of inventors (2019)
Working Paper: Do tax cuts produce more Einsteins? The impacts of financial incentives vs. exposure to innovation on the supply of inventors (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25493

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25493

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().