Innovating in Science and Engineering or "Cashing In" on Wall Street? Evidence on Elite STEM Talent

Using data on MIT bachelor's graduates from 1994 to 2012, this paper empirically examines the extent to which the inflow of elite talent into the financial industry affects the supply of innovators in science and engineering (S&E). I first show that finance does not systematically attract those who are best prepared at college graduation to innovate in S&E sectors. Among graduates who majored in S&E, cumulative GPA strongly and positively predicts long-term patenting; this result is robust to controlling for choices of major and career. In contrast, GPA negatively predicts the probability of taking a first job in finance after college. There is suggestive evidence that S&E and finance value different sets of skills: innovating in S&E calls for in-depth knowledge and/or interest in a specific subject area, whereas finance tends to value a combination of general analytic skills and social skills over academic specialization. I then provide evidence that anticipated career incentives influence students' acquisition of S&E human capital during college. The 2008-09 financial crisis, which substantially reduced the availability of jobs in finance and led to a worsening labor market in general, prompted some students to major in S&E instead of management or economics and/or to improve their academic performance. This response to the shock is driven by students with below-average academic credentials who were freshmen at the peak of the crisis.