Working Paper: CEPR ID: DP6567
Authors: Daisuke Oyama; Yasuhiro Sato; Takatoshi Tabuchi; Jacques-Francois Thisse
Abstract: This paper investigates the impacts of progressive trade openness, technological externalities, and heterogeneity of individuals on the formation of entrepreneurship in a two-country occupation choice model. We show that trade opening gives rise to a non-monotonic process of international specialization, in which the share of entrepreneurial firms in the large (small) country first increases (decreases) and then decreases (increases), with the global economy exhibiting first de-industrialization and then re-industrialization. When countries have the same size, we also show that strong technological externalities make the symmetric equilibrium unstable, generating equilibrium multiplicity, while sufficient heterogeneity of individuals leads to the stability and uniqueness of the symmetric equilibrium.
Keywords: Entrepreneurship; Externality; Heterogeneity; Stability; Trade Liberalization
JEL Codes: F12; F16; J24; O14; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | increase in the number of entrepreneurs in the large country (O51) |
| trade liberalization (F13) | decrease in the number of entrepreneurs in the large country (O51) |
| trade liberalization (F13) | increase in the number of entrepreneurs in the small country (M13) |
| trade liberalization (F13) | decrease in the number of entrepreneurs in the small country (M13) |
| strong technological externalities (O36) | destabilization of equilibria (D50) |
| local heterogeneity among individuals (D29) | restoration of stability (C62) |