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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.

Suggested Citation

  • Pokrovsky Dmitry & Behrens Kristian & Zhelobodko Evgeny, 2014. "Market Size, Entrepreneurship, and Income Inequality," EERC Working Paper Series 14/01e, EERC Research Network, Russia and CIS.
  • Handle: RePEc:eer:wpalle:14/01e

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    References listed on IDEAS

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    Cited by:

    1. Behrens, Kristian & Kanemoto, Yoshitsugu & Murata, Yasusada, 2015. "The Henry George Theorem in a second-best world," Journal of Urban Economics, Elsevier, vol. 85(C), pages 34-51.
    2. Behrens, Kristian & Robert-Nicoud, Frédéric, 2015. "Agglomeration Theory with Heterogeneous Agents," Handbook of Regional and Urban Economics, Elsevier.
    3. Chhy, Niroth, 2016. "The Rise of the Working Rich, Market Imperfections, and Income Inequality," MPRA Paper 75373, University Library of Munich, Germany.
    4. Vera Ivanova & Philip Ushchev, 2015. "When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition," HSE Working papers WP BRP 99/EC/2015, National Research University Higher School of Economics.
    5. Pokrovsky, D. & Shapoval, A., 2015. "Distribution of Entrepreneurial Skills and Migration: Employment Structure, Income Inequality, and Welfare," Journal of the New Economic Association, New Economic Association, vol. 26(2), pages 36-62.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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