Entrepreneurs, Sudden Stops, and Inequality

Abstract

This paper quantifies the importance of heterogeneity across entrepreneurs in accounting for aggregate and distributional dynamics during sudden stops. Using Argentinian household survey data from 1996 and 2003, I establish that the income distribution of entrepreneurs widened relative to that of workers. Motivated by this, I develop a small open-economy, heterogeneous-agent model with occupational choice in which households endogenously select into being a worker, a self-employed entrepreneur, and an employer entrepreneur. The model rationalizes aggregate and distributional features of sudden stops that standard models cannot. The model shows that a tax on assets and capital reduces the probability of a sudden stop, reduces long-run welfare, and dampens the relative widening of the income distributions by disincentivizing entrepreneurship.

Keywords: Sudden stops, Small open economy, Entrepreneurs, Financial crisis