In order to examine the impacts of market size on entrepreneurship, we estimate a monopolisticcompetition model that involves the workers' decisions to pursue entrepreneurship by using dataon Japanese prefectures. Our results show that a larger market size in terms of populationdensity leads to a higher incentive for individuals to become entrepreneurs. A 10% increase inthe population density increases the share of people who wish to become entrepreneurs byapproximately 1%. In contrast, such a positive effect on the self-employment rate is observedonly for prefectures with very high or very low densities. The self-employment ratio isnegatively associated with population density in prefectures with medium densities.