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Market size,occupational self‐selection,sorting, and income inequality
Authors:Kristian Behrens  Dmitry Pokrovsky  Evgeny Zhelobodko
Affiliation:1. Department of Economics, Université du Québec à Montréal (ESG–UQAM), United Kingdom;2. National Research University Higher School of Economics, Russia;3. In memoriam (1973–2013), Novosibirsk State University, Russia
Abstract: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.
Keywords:income inequality  market size  occupational self‐selection  sorting
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