Institutions and the Allocation of Talent: Evidence from Russian Regions

Abstract: Strong institutions attract talent to productive activities, whereas weak ones raise the appeal of redistribution and rent-seeking. We propose a theory that describes the impact of institutions on occupational choices and shows that more talented individuals are particularly sensitive in their career choices to the quality of institutions. To test these predictions empirically, we use a unique micro data set describing the choices of fields of studies by newly enrolled university students in Russian regions in 2011-2014. We show that the popularity of sciences and engineering among Russia’s youth with higher ability as measured by the Unified State Examination scores increases in the quality of regional investment climate, whereas for law and public administration this relationship is negative. This confirms that investments in human capital reflect the quality of institutions, pointing to a mechanism connecting institutions to economic outcomes.