Quality of Institutions and the Allocation of Talent: Cross‐National Evidence

Abstract

Strong institutions attract talent to productive activities, whereas weak ones raise the appeal of redistribution. We find a strong positive cross‐country association between the quality of institutions and graduation of university students in science, and an even stronger negative correlation with graduation in law. These findings are robust to various specifications of empirical models. We also demonstrate that institutions dominate other factors affecting the allocation of talent. Finally, we present direct evidence that (mis)allocation of talent between productive and unproductive activities driven by institutional quality explains the discrepancy between private and public returns to education.