Entrepreneurship and Occupational Choice in the Global Economy

Federico Diez and Ali Ozdagli

No 1004, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the effects of trade costs and foreign competition on entrepreneurship. We begin by pointing out a previously unknown fact: the higher the trade costs, the smaller the fraction of entrepreneurs. This fact holds across countries and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed entrepreneurs in the spirit of \citet{lucas:78}. This, in turn, translates into intra-industry firm heterogeneity as in \citet{melitz:03}. Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (i) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (ii) domestic self-employment increases with the trade costs of exporting to the foreign country, (iii) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States corroborates these predictions of the model.

Date: 2012
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