Abstract
We empirically test the hypothesis that relatively high returns to talent explain the wage premium for working in finance. We exploit a special feature of the French educational system to build a precise measure of talent that we match with compensation data on graduates of elite French institutions. Using this measure, we show that wage returns to talent are three times higher in the finance industry than in the rest of the economy.This greater sensitivity to talent almost fully explains the level of the finance wage premium, its evolution since the 1980s, and, at the individual level, the pay increase workers obtain when joining the finance industry. Finally, returns to talent correlate with the share of variable compensation.
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