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Market Size, Entrepreneurship, and Income Inequality

Dmitry Pokrovsky, Kristian Behrens () and Evgeny Zhelobodko

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: We develop a monopolistic competition model with two sectors and heterogeneousagents who self-select into entrepreneurship, depending on entrepreneurial ability. Theeffect of market size on the equilibrium share of entrepreneurs crucially hinges on propertiesof the lower-tier utility function for differentiated varieties – its elasticity of substitutionand 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 marketsize. The properties of the underlying ability distribution largely determine how incomeinequality changes with market size.

JEL-codes: D43 L11 L13 L26 (search for similar items in EconPapers)
Date: 2014-01-30
New Economics Papers: this item is included in nep-bec, nep-com and nep-ent
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