Talent Hoarding, Misallocation, and Innovation: A Dynamic Model of Labor Market Distortions by Large Incumbents

Abstract

We develop the first formal model on how large incumbent firms in tech and finance systematically hoard top talents to the detriment of labor market efficiency, resource allocation, and long‐term innovation. With a dynamic model of competition to acquire talents, our framework highlights two key drivers of persistent overhiring: (i) they retain multiple specialized teams under technological uncertainty, thereby preserving option‐like flexibility to implement the subset of technologies deemed most valuable and (ii) they attract risk-averse workers by offering equity-based compensation that facilitates risk sharing. And when specialized firms face liquidity constraints, two additional channels emerge: (iii) incumbents leverage deep pockets to outbid smaller rivals for specialized human capital and (iv) they preemptively hire talented researchers to block competitors' R&D. Each channel can misallocate talent away from their most fit and innovative uses, diminish their human capital, and hamper overall innovation efficiency, as private incentives diverge from socially optimal talent deployment. We characterize how private wage-setting outcomes systematically diverge from efficient allocations using an equilibrium model. We then connect our theoretical results to literature on skill mismatch, labor-market frictions, and potential career stagnation among hoarded researchers. Comparative statics and welfare analyses reveal how talent hoarding reinforces incumbents' market power, discourages startup formation, and weakens knowledge diffusion. We address long-standing concerns about firm strategies in overhiring and the consequences of talent misallocation, laying the groundwork for future empirical studies and policy interventions.

Keywords: Talent hoarding, Labor misallocation, Innovation efficiency, Large incumbents, Risk-sharing, Dynamic labor models, Market Equilibrium

JEL Classification: J24, O31, D4, D61, L1, L26