Ethnic entrepreneurship, assimilation, and integration policy

This paper studies the assimilation of ethnic minority individuals to the native labor market and the impact of integration policies on assimilation. In our theoretical model, ethnic individuals choose, depending on their productivity level, among: entrepreneurship, assimilating to the native labor market, and being employed by coethnic entrepreneurs. We find that when integration policies increase the returns of assimilation to the native labor market, there will be more ethnic entrepreneurs and more workers hired in the ethnic sector. This counter‐intuitive result is due to wage adjustment in the ethnic sector. In terms of social welfare, we find that the social planner prefers that more ethnic individuals assimilate to the native labor market relative to the decentralized equilibrium. We propose a policy mix that restores the efficiency of the equilibrium.