Abstract

Joint with Chong-en Bai (Tsinghua University), Ruixue Jia (LSE and UCSD) Hongbin Li (Stanford University), and Xin Wang (CUHK)

How likely are talented individuals to create firms and why? We study this question by linking administrative college admissions data for 1.8 million individuals with the universe of firm registration records in China and studying who created firms by their mid-30s. Given the same college background, we find that individuals with higher college entrance exam scores—the most important measure of talent and a subject of great debate in this context—are less likely to create firms; however, when they do, their firms are more successful than those of their lower-score counterparts. Other results suggest that higher-score individuals receive higher wages and are more likely to join the state sector. Among several hypotheses, the most plausible interpretation is that the score is positively associated with both entrepreneurial ability and wage-job ability but that higher-score individuals are attracted to waged jobs, particularly those of the state sector. Our findings speak to whether the exam score measures ability and how the reward structure of a society governs the allocation of ability.