Allocation of talent to the government sector: Implications for growth in developing countries

The "cost-of-talent" literature holds that economic stagnation is a result of the allocation of entrepreneurial talent to unproductive activity. This dissertation introduces the government sector into the one-sector economy model developed by Murphy et al. (1991). The model shows that misallocation of talent can result from a wage structure that is biased toward the government sector, and away from the manufacturing sector. A biased wage structure distorts the equilibrium allocation of individuals into workers and entrepreneurs. This leads to allocation-inefficiency because comparably sized private sector firms and government sector bureaus choose different employment levels. This dissertation carries out econometric analyses on cross-sectional data of 52 countries. It proposes two variables as direct measures of the allocation of talent in developing countries: (i) the government sector employment share of total nonagricultural employment; and (ii) a relative wage constructed as a ratio of manufacturing sector wages and salaries to government sector wages and salaries. The empirical findings strongly support the theoretical proposition that a rise in government sector wages and salaries relative to the manufacturing sector wages and salaries causes the growth rate of output to fall. They also strongly support the proposition that concentration of employment in the government sector causes the growth rate to fall.