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Market Size, Entrepreneurship, and Income Inequality

  • Pokrovsky Dmitry


  • Behrens Kristian


  • Zhelobodko Evgeny

We develop a monopolistic competition model with two sectors and heterogeneousagents who self-select into entrepreneurship, depending on entrepreneurial ability. Theeffect of market size on the equilibrium share of entrepreneurs crucially hinges on propertiesof the lower-tier utility function for differentiated varieties – its elasticity of substitutionand 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 marketsize. The properties of the underlying ability distribution largely determine how incomeinequality changes with market size.

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Paper provided by EERC Research Network, Russia and CIS in its series EERC Working Paper Series with number 14/01e.

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Date of creation: 30 Jan 2014
Date of revision:
Handle: RePEc:eer:wpalle:14/01e
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