The Finance Wage Premium and Entrepreneurship

Abstract

Does the finance wage premium cause a “brain drain” of engineers and scientists to finance, reducing innovative entrepreneurship? Or do engineer-financiers facilitate innovative entrepreneurship by others? Comparing engineers in the same school-engineering-major who graduate one year apart, we show that those exogenously exposed to higher relative finance wages at graduation are more likely to take finance jobs. Engineers who take finance jobs when finance wages are high are less likely to become entrepreneurs, but their classmates who do not go to finance are more likely to create successful firms. Consistent with a peer effects mechanism, we show that top engineers are more likely to become transformative entrepreneurs if more of their classmates are in private equity, venture capital, and investment banking jobs. Our results suggest that a finance wage-premium attracts talented engineers to finance, but not those with the most entrepreneurial skills.

Keywords: Finance wage premium; Talent allocation; Entrepreneurship; Innovation.

JEL Classification: G2, G20, J2, J3, J31, M52, N2