Market Size, Entrepreneurship, and Income Inequality

52 Pages Posted: 2 Jun 2014

See all articles by Kristian Behrens

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics

Dmitry Pokrovsky

National Research University Higher School of Economics

Evegeny Zhelobodko

Novosibirsk State University - Department of Economics

Date Written: February 2014

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

JEL Classification: D31, D43, L11, L26

Suggested Citation

Behrens, Kristian and Pokrovsky, Dmitry and Zhelobodko, Evegeny, Market Size, Entrepreneurship, and Income Inequality (February 2014). CEPR Discussion Paper No. DP9831, Available at SSRN: https://ssrn.com/abstract=2444832

Kristian Behrens (Contact Author)

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Dmitry Pokrovsky

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Evegeny Zhelobodko

Novosibirsk State University - Department of Economics ( email )

2 Pirogova Street
Novosibirsk 630090
Russia

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