Working Paper: CEPR ID: DP9831
Authors: Kristian Behrens; Dmitry Pokrovsky; Evgeny Zhelobodko
Abstract: We develop a monopolistic competition model with two sectors and heterogeneous agents who self-select into entrepreneurship, depending on entrepreneurial ability. The effect of market size on the equilibrium share of entrepreneurs crucially hinges on properties of the lower-tier utility function for differentiated varieties ? its elasticity of substitution and its Arrow-Pratt index of relative risk aversion. We show that the share of entrepreneurs, and the cutoff for self-selection into entrepreneurship, can increase or decrease with market size. The properties of the underlying ability distribution largely determine how income inequality changes with market size.
Keywords: entrepreneurship; heterogeneous agents; income inequality; market size; monopolistic competition
JEL Codes: D31; D43; L11; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Size (L25) | Share of Entrepreneurs (L26) |
| Market Size (L25) | Self-Selection Cutoff for Entrepreneurship (L26) |
| Market Size (L25) | Income Inequality (D31) |