DP6567 Trade and Entrepreneurship with Heterogeneous Workers

Author(s): Daisuke Oyama, Yasuhiro Sato, Takatoshi Tabuchi, Jacques-François Thisse
Publication Date: November 2007
Keyword(s): entrepreneurship, externality, heterogeneity, stability, trade liberalization
JEL(s): F12, F16, J24, O14, R12
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6567

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.