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 (1990) 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 equality is associated with a larger share of the population employed in the business of invention. However, inventors of an equal society are not as creative as those of an unequal one. As a result an inverted-U curve relating inequality and the innovation rate emerges, indicating that departures from extreme forms of equality or inequality are growth-enhancing. I discuss evidence that agrees with the main implications of the analysis, namely that the market size and the number of inventors are negatively affected by inequality. Finally, a calibration exercise suggests that in recent decades the U.S. has been in the ascending portion of the inequality-growth curve.