Superstar (and Entrepreneurial) Engineers in Finance Jobs · Finance Jobs Nandini Gupta and Isaac Hacamo Kelley School of Business, Indiana University December 2017. MotivationResearch

Motivation Research Question Data Empirical Design Results Summary Stats Robustness

Superstar (and Entrepreneurial) Engineers inFinance Jobs

Nandini Gupta and Isaac Hacamo

Kelley School of Business, Indiana University

December 2017


Allocation of superstar talent

• Individuals with the potential to become successful scientists,inventors, and entrepreneurs are in limited supply (Azoulay et al.,2010, Baumol et al., 2009, Malmendier and Tate, 2009).

• For example, elite engineers, with the potential to be breakthroughinventors, have skills that are also in demand in other sectors.

• One such sector is finance. Wage premium for skilled financeworkers following rapid wage growth in last 30 years (Philippon andReshef 2012), has led to debate on whether finance competes forscarce talent with other sectors (Kaplan and Rauh, 2010, Glode andLowery, 2015, Benabou and Tirole, 2016, Bond and Glode, 2014).


This paper

• Data from largest online business networking service in the U.S.

• Information on school, degree, major, graduation honors, employer,occupation.

• Observe education and career paths of ~70,000 engineers from 12top ranked U.S. engineering schools who graduate between 1998 and2008.


Questions

• Does financial sector growth attract more talented engineers fromnon-finance jobs?

• Existing evidence finds finance workers not more skilled on average(Shu 2016, Bohm, Metzger, and Stromberg, 2016) → skill differencedoes not explain finance wage premium.

• Are top engineers employed in engineering-related occupations infinance?

• Ineffi cient education occupation mismatch if talent shortfall in othersectors and/or engineers lack finance skills (Warren Buffet - bewareof Geeks bearing bonds).

• Do elite engineers who switch to finance become innovativeentrepreneurs?

• Working in finance develops generalized skills (Custodio et al. 2013)and gain access to finance (Petersen and Rajan, 1994, Engelberg etal. 2012). Or may result in loss of specialized skills.


Why engineers?

• Engineers are in demand across sectors - highest paid undergraduatecollege major in the U.S. (Carnevale, 2015).

• Majority of U.S. inventors have an engineering degree (Walsh andNagaoka, 2009).

• Supply of engineers limited - “U.S. would need to produce 1 millionmore STEM professionals over the next decade to match demand”(President’s Council of Advisors on Science and Technology, 2012).


Why finance?• Historically unprecedented growth in the size of the U.S. financialsector relative to GDP in recent decades (Philippon and Reshef,2012), which we use to identify a “pull” of scarce talent into thissector.

• Increased demand for engineers in finance - 1/3 of MIT’sengineering class before the crisis.

• Macro data shows rising trend in transition of engineers to finance.

Transitions of Engineers to Finance: Evidence from CPS


Preview of findings

• Financial sector growth attracts engineers from more selectiveschools, and those who received graduation honors, fromnon-financial sector jobs.

• Elite engineers who switch to finance are less likely to be employedin engineering-related occupations in finance.

• Elite engineers who switch to finance due to financial sector growthare significantly less likely to become innovative entrepreneurs.


Related literature• Literature on wages and human capital in finance shows a wagepremium, examines causes of high pay (Philippon and Reshef 2012;Axelson and Bond 2015; Boustanifar et al. 2017; Celerier and Vallee2017), and consequences for income inequality (Kaplan and Rauh,2010, Bell and Van Reenen, 2013, 2014).

• Recent studies also use individual level to suggest that financeindustry does not attract talent (Shu 2016, Bohm et al. 2016).

• Our paper is also related to the labor economics literature oneducation-occupation mismatch (Robst 2007; Altonji, Blom and andMeghir 2012; Ransom and Phipps 2016).

• Literature on determinants of innovative entrepreneurship, with afocus on professional experience (Hombert, Schoar, Sraer, andThesmar, 2014; Hacamo and Kleiner 2016, Babina 2016, Gottlieb,Townsend, and Xu, 2016).


Data


Construction of the Dataset• From the top 20 engineering schools according to U.S. News andWorld Report rankings, we selected 12 schools that are a mix ofpublic and private institutions, spread across the country.

• Engineering Schools: MIT, Stanford, UC Berkeley, CaliforniaInstitute of Technology, Carnegie Mellon, Cornell, Northwestern,Illinois Urbana-Champaign, Georgia Tech, UCLA, UW-Madison, andUT-Austin.

• We then went to the largest Online Business Networking Service(OBNS) and obtained employment and education data for allengineering graduates of the 12 top engineering schools.

• Obtained data for all graduating cohorts from 1998 to 2009, andended up with a sample of ~ 70,000 engineers.• Coverage ranges from 93%-99% across schools for each graduatingcohort.


Data sources

• Employment history: Employer name, job start and end dates, jobtitle, and (sometimes) job description and location from OBNS.

• Education: Degrees, schools, major, graduation year.• Firm characteristics: Industry, employment size, headquarterlocation, year founded, and firm activity description from OBNS.

• Honors Data: Latin Honors from commencement programs(Stanford, Caltech, and Northwestern). For the rest of sample, weuse the honors information in the OBNS profile.


Relevant Facts from Summary Stats

• On average 4.57% of engineers go to finance upon graduation.Within 5 years of graduation, 4.97% working in other sectors moveto finance.

• At highest ranked schools (Carnegie, Caltech, Cornell, MIT,Northwestern, Stanford), 6.35% move at graduation and 5.95%within 5 years, while for other schools, 3.45% move to finance upongraduation and 4.37% within 5 years.

• Of engineers who move to finance, about 25% have IT jobs, while75% are traders, VPs, analysts, quants, managers, etc.

• Within 5 years of graduation, 5% of the engineers tried anentrepreneurship endeavor.

• Within the full sample, 1% of engineers created innovative firms(firms that have at least one patent).


Empirical Design


Endogeneity concerns with aggregate data

• Census data shows transition of engineers to finance coincides withfinancial sector growth years.

• Macro regression subject to endogeneity concerns:• Push versus pull: Employment decline in engineering related jobs.• Individual preference for finance.

• Our approach: Use individual level data and geographic variation inlocation.


Introduction to Empirical DesignConsider two engineering graduates from the same top school, samemajor, same graduation year


Empirical Design

Both Mike and Peter take engineering jobs at graduation (in early2000s) in similar sized firms in the same industry, but in differentcities.


Empirical Design

• Use unprecedented growth in the finance industry starting in the mid1990s as a shock to metro areas across the United States.

• Identify metro areas that are predisposed to be more affected bynational growth in finance by estimating the proportion ofcollege-educated workers employed in finance in a metropolitan areain 1990.

• Regions with greater pre-existing presence of financial sectoremployment are more likely to be affected by the national growth infinance, than regions with a low initial finance presence.


Empirical Design

Is Mike, who is in St. Louis, more likely to move to finance than Peter,who is in Cincinnati, during the 2000s?


Distribution of finance presence across metro areas

The mean MSA Finance Share in 1990 is 3.1%, the 25th percentile is2.3%, and the 75th percentile is 3.9%.


MSA Finance in 1990 and Growth in 2000s


MSA Finance in 1990 and Sorting of Engineers


Results


Regression ModelWe test whether finance growth is associated with a move of the engineers ofour sample ( β1 > 0):

Prob. Switch to Financei = β1 ×MSA Finance Share in 1990i+θ1 ×MSA Emp Share in Engi+θ2 ×MSA Size+θ3 ×MSA Emp Growth+School-Year graduation-Major FE

+ Firm Size Class FE

+ Firm-Industry FE+ εi ,

• Errors clustered at MSA level.• Use firm fixed effects and exclude major financial centers to address“push” from declining firms; geographic self selection.

• Examine switches over time to control for fixed regional characteristics.• MSA share of employment in Finance in 1980; MSA share of employmentin Securities, Credit Intermediation.


Does Financial Sector Growth Attract Engineers?

Likelihood of switching to finance is 30% higher for engineer in 75th percentileof MSA finance share compared to 25th percentile, relative to mean of 5%.


Excluding major financial centersTo address “geographic self selection” into metro areas that are financialcenters.

Likelihood of switching to finance is 29% higher for engineer in 75th percentileof MSA finance share compared to 25th percentile, relative to mean of 5%.


Within firm analysis

To address “push” from declining fims and/or geographic selection we considerclassmates who work in different branches of same firm in different locations.


Rolling windows

Robust to fixed industrial characteristics in metros that affect location ofengineers; More moves in peak finance growth years.


Does Financial Sector Growth Attract Elite Engineers?School rank

Comparing high and low finance growth metros, a top ranked school engineer isthree times more likely to move to finance than lower rank school engineers.


Does Financial Sector Growth Attract Elite Engineers?Honors data

• Hand-collect data from commencement programs on which studentsgraduated with honors (i.e.,Cum Laude, Summa Cum Laude, andMagna Cum Laude).

• So far we have collected this data from the library archives forStanford, Northwestern, and Caltech.

• Some engineers also mentioned in the online profile that theygraduated with honors.


Does Financial Sector Growth Attract Elite Engineers?Honors data


Does Finance Growth Lead to an Education-OccupationMismatch?

Top school engineers more likely to take finance-specific rather thanengineering specific jobs in finance.


Examples of firms founded by elite engineers in our data

• Biomedtech• Biological Dynamics• Dropbox• Khan Academy• Fetch Robotics• Google Voice and Google Analytics• Hitch (acquired by Lift)• Quora• Redfin• Sienna Labs, Inc.• Skybox Imaging (acquired by Google)• SurveyMonkey• Yelp.com


Financial sector growth and entrepreneurship

Do elite engineers who switch to finance become innovativeentrepreneurs?

• Working in finance can develop generalized skills (Custodio et al.2013) and provide access to finance (Petersen and Rajan, 1994,Engelberg et al. 2012).

• Or may result in a loss in specialized skills.• We identify all the firms (or co-founded) created by the engineers inour sample.

• We then go to the USPTO website and identify the patents createdby the firms founded by our engineers.

• Finally, we identify the firms that are created by our engineers andare innovative (create at least one patent).






Do elite engineers who switch to finance becomeinnovative entrepreneurs?

Prob. (Innovative) Entrepreneuri = β1 ×Move to Finance00−08×MSA Emp Share in Financei ,1990+β2 ×Move to Finance00−08+β3 ×MSA Emp Share in Financei ,1990+MSA Controls

+School-Year graduation-Major FE

+Firm-Industry FE

+Firm- Size FE+ εi ,

• Move to Finance00−08 equal to one if engineer who graduated between1998 and 2006 switched to finance between 2000 and 2008.

• Identify all the firms founded (or co-founded) by engineers in our sample.• Identify patents created by the firms founded by our engineers fromUSPTO website, and identify innovative firms (create at least one patent).


Do elite engineers who switch to finance becomeinnovative entrepreneurs?

Top school engineer is 40% less likely to create an innovative firm (with >=1patent) in the long-run.


Concluding remarks

• We show that financial sector growth attracts more talented workersfrom other sectors, which suggests an explanation for the financewage premium and is consistent with theoretical predictions ofincreased competition with other sectors for scarce talent.

• Elite engineers are more likely to be employed in finance-specificrather than engineering-specific occupations in finance, suggestingan ineffi cient education-occupation mismatch.

• Compared to classmates, engineers from top schools who switch tofinance due to financial sector growth are significantly less likely tobecome innovative entrepreneurs.


Describing engineers who move to finance


Occupations of engineers in finance


Robustness: Do engineers move from the decliningmanufacturing sector?


Robustness: Is it CS majors?


Robustness: Effects after 2008


Robustness: Excluding moves from ManagementConsulting


Robustness: Moves to Management Consulting

Documents

Superstar (and Entrepreneurial) Engineers in Finance Jobs · Finance Jobs Nandini Gupta and Isaac Hacamo Kelley School of Business, Indiana University December 2017. MotivationResearch