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Title: Market Size, Entrepreneurship, and Income Inequality

Author(s): Kristian Behrens, Dmitry Pokrovsky and Evgeny Zhelobodko

Publication Date: February 2014

Keyword(s): entrepreneurship, heterogeneous agents, income inequality, market size and monopolistic competition

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Behrens, K, Pokrovsky, D and Zhelobodko, E. 2014. 'Market Size, Entrepreneurship, and Income Inequality'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9831