The Decision to Become an Entrepreneur and the Firm Size Distribution: A Unifying Framework for Policy Analysis

Markus Poschke

No 7757, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Developing and emerging economies have high entrepreneurship rates and relatively many small firms. There is enormous heterogeneity among these firms and entrepreneurs. This paper presents a simple occupational choice model that captures motives for entrepreneurship at both edges of the size distribution. The model is then used to analyse the effects of productivity growth, distortions, financial and labor market frictions, and risk. Capturing entrepreneurship across the size distribution allows for different reactions of high- and low-ability entrepreneurs to changes in policies and the environment. These may result in powerful general equilibrium effects. In particular, policies affecting high-ability entrepreneurs potentially running large firms can indirectly have a strong effect on entry by low-ability entrepreneurs and thus on the prevalence of small firms.

Keywords: entrepreneurship; firm entry and exit; development; labor market regulation (search for similar items in EconPapers)
JEL-codes: J24 L26 O11 O17 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2013-11
New Economics Papers: this item is included in nep-bec, nep-cse and nep-ent
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Citations: View citations in EconPapers (2)

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