Market Size, Entrepreneurship, and Income Inequality

Kristian Behrens (), Evgeny Zhelobodko and Dmitry Pokrovsky

No 9831, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D31 D43 L11 L26 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-bec and nep-ent
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Citations: View citations in EconPapers (8)

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Working Paper: Market Size, Entrepreneurship, and Income Inequality (2014)
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