Discussion paper

DP9831 Market Size, Entrepreneurship, and Income Inequality

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.


Behrens, K and E Zhelobodko (2014), ‘DP9831 Market Size, Entrepreneurship, and Income Inequality‘, CEPR Discussion Paper No. 9831. CEPR Press, Paris & London. https://cepr.org/publications/dp9831