Lesson 3: Star inventors earn more than $1 million per year, suggesting that further increasing financial incentives or reducing tax rates may have small effects on innovationThe average patent holder earns approximately $256,000 per year in his or her mid-forties. But the individuals who make discoveries that have the greatest scientific impact – i.e. those who produce the most highly-cited patents – earn more than $1 million on average per year (Figure 4). Scientific progress is largely driven by a few star inventors who are highly compensated for their work by the market.
Figure 4 Inventors’ annual incomes by scientific impact
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Women, minorities, and individuals from low income families are as under-represented among star inventors as they are among inventors as a whole. Given our finding that innovation ability does not vary substantially across these groups, this result implies there are many ‘lost Einsteins’ – people who would have had high-impact inventions had they become inventors – among the under-represented groups.
These findings suggest that changes in financial incentives (e.g. by reducing tax rates) have limited scope to increase innovation, for two reasons. First, changes in incentives affect only the small subset of individuals who have exposure to innovation. Second, such policies are unlikely to influence the decisions of star inventors who matter most for economic growth. Star inventors – who typically earn more than $1 million per year – would presumably be happy to work in their field even if they earned say $950,000 instead of $1 million per year.3 We caution, however, that these predictions remain to be tested empirically and that taxes could potentially affect economic growth through other channels, for instance by changing the behaviour of firms or other workers.
Policy implicationsIf women, minorities, and children from low-income families were to invent at the same rate as white men from high-income (top 20%) families, the rate of innovation in America would quadruple. Our findings therefore call for greater focus on policies that harness the under-utilised talent in these groups by providing them greater exposure to innovation. Such policies could range from mentoring programmes to internships to interventions through social networks. Our analysis does not tell us which programs are most effective, but it does provide some guidance on how they should be targeted. Targeting exposure programmes to children from under-represented groups who excel in mathematics and science at early ages is likely to maximise their impacts. Furthermore, tailoring programmes to participants' backgrounds may be valuable: for example, women are more influenced by female rather than male inventors.
More broadly, our results suggest that improving opportunities for disadvantaged children may be valuable not just to reduce disparities but also to spur greater innovation and growth (Aghion et al. 2017).
ReferencesAghion, P, U Akcigit, A Hyytinen and O Toivanen (2017), “The Social Origins of Inventors” Centre for Economic Performance Discussion Paper 1522 (see also the Vox column here).
Aghion, P and P Howitt (1992), “A Model of growth through Creative Destruction” Econometrica60(2): 323-351
Bell, A, R Chetty, X Jaravel, N Pektova and J Van Reenen (2017), “Who Becomes an Inventor in America? The Importance of Exposure to Innovation”, The Equality of Opportunity Project.
Romer, P (1990), “Endogenous Technological Change”, Journal of Political Economy 98(5): S71-S102.
Endnotes[1] Not all patents are meaningful new inventions; however, we show that focusing on the subset of patents that have the most substantial scientific impact, as measured by future citations, generates very similar results to those discussed below.
[2] This result also weighs against the hypothesis that a lack of access to funding or an aversion to risk discourage low-income students from pursuing innovation, as those factors would generate gaps in innovation rates even among students attending the same college.
[3] Even if people are uncertain about their chances of becoming a star when deciding whether to pursue innovation, tax changes are unlikely to have large effects. The payoffs to innovation are similar to a buying a lottery ticket. Most of the time one doesn’t win (in which case tax rates don’t matter), but sometimes one hits the jackpot and wins millions (in which case a slightly smaller payout won’t reduce interest in buying a ticket by much).