The Allocation of Talent and Financial Development, 1897 to 1936

We examine how the supply of talent affected financial development based on an experiment that abruptly changed the allocation of talent in historical China. Under the meritocratic civil examination system, government service was the main employment for the Chinese intellectuals. The abolition of this system in 1905 reduced the status and wealth attached to government service, which led the intellectuals to turn to modern banking as a high-status sector of employment. We find that regions where there were more candidates for the civil examination produced more financial professionals after 1905, which translated to a greater development of modern banking. This paper was accepted by Lin William Cong, finance. Funding: C. Lin and C. Ma acknowledge the Research Grants Council of Hong Kong [Grant AoE/B-704/22-R], Y. Sun acknowledges the Young Scientists Fund of the National Natural Science Foundation of China [Grant 72203037] and the Fundamental Research Funds for the Central Universities in UIBE [Grant 20QD14; CXTD12-01], and Y. Xu acknowledges the Young Scientists Fund of the National Natural Science Foundation of China [Grant 72203013] for financial support. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00456 .