Distance to the Technology Frontier and the Allocation of Talent

This paper develops a matching model - in which heterogeneous individuals form production teams and choose an appropriate technology - to study how the technological environment changes the pattern of matching and the production structure of an economy. I show that if technology improvements are expensive, teams bring high and low skilled individuals together and all teams choose similar technologies. In contrast, if improvements are inexpensive, talent concentrates in teams that choose the most advanced technologies, leading to larger dispersion of economic activity. Then, I apply the theory to study cross-country differences in the allocation of talent. Since relatively poor countries can make cheap and large improvements through technology adoption, the theory predicts that they should have stronger concentration of talent than relatively rich ones. I derive an empirical measure of the concentration of talent from the model to validate this prediction using micro data from several countries; in the cross-section, using a sample of 63 countries, and in the time-series, comparing the growth experiences of South Korea and United States. Finally, a dynamic extension of the theoretical framework demonstrates that endogenous allocation of talent coupled with localized technological progress may prevent cross-country convergence even in the absence of exogenous barriers.