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Market size, occupational self‐selection, sorting, and income inequality
Author(s) -
Behrens Kristian,
Pokrovsky Dmitry,
Zhelobodko Evgeny
Publication year - 2018
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/jors.12342
Subject(s) - monopolistic competition , sorting , inequality , economics , income distribution , economic inequality , market size , competition (biology) , labour economics , free entry , microeconomics , monopoly , computer science , commerce , mathematical analysis , mathematics , programming language , ecology , biology
We develop a monopolistic competition model with heterogeneous agents who self‐select into occupations (entrepreneurs and workers) depending on innate ability. The effect of market size on the equilibrium occupational structure crucially hinges on properties of the lower tier utility function—its scale elasticity and relative love‐for‐variety. When combined with the underlying ability distribution, the share of entrepreneurs and income inequality can increase or decrease with market size. When extended to allow for the endogenous sorting of mobile agents between cities, numerical examples suggest that sorting may increase inequality within and between cities.