Social Exposure, Innovator-Consumer Homophily, and Inequality: Evidence from College Peers

Abstract

We investigate the importance of social networks for the direction of entrepreneurship and innovation. Using quasi-experimental variation in the gender and socioeconomic composition among college peers in Finland, we show that exposure to lower-income peers increases the likelihood that an entrepreneur founds a firm in a necessities industry without affecting entrepreneurial income. Likewise, increased exposure to female peers increases entrepreneurial activities targeting female consumers. These effects are largest among groups over-represented in innovation: men and individuals from high-income backgrounds. We assess the macro implications of this heterogeneity in an endogenous growth model and find that differences in college peer composition explain around a quarter of the observed inventor–consumer homophily by gender, inducing a significant cost-of-living disadvantage for women. These findings show that innovators’ social experiences have a causal impact on the direction of innovation, independent of financial incentives.

JEL Classification: O30, L26, J16