Education and the Allocation of Talent

The purpose of this paper is to study how education shapes the allocation of talent. To model the link between education and the allocation of talent, we add two features to a Spence (1974) type of two-sector education model. First, performance contracts give a worker incentives to choose the sector where (she believes she is) most productive. Second, education increases a worker's information capital, through giving the worker information about her abilities, and hence may affect the desired sector or job to work in. The baseline model predicts that workers with average ability educate, while the most able skip education. In an extension, we compare the UK and the US Bachelor's degrees and, moreover, analyze hybrid educational systems, common in Europe, that offer both UK and US types of Bachelor's degrees