DP9831 Market Size, Entrepreneurship, and Income Inequality
|Author(s):||Kristian Behrens, Dmitry Pokrovsky, Evgeny Zhelobodko|
|Publication Date:||February 2014|
|Keyword(s):||entrepreneurship, heterogeneous agents, income inequality, market size, monopolistic competition|
|JEL(s):||D31, D43, L11, L26|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9831|
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.