DP6567 Trade and Entrepreneurship with Heterogeneous Workers

Author(s): Daisuke Oyama , Yasuhiro Sato , Takatoshi Tabuchi , Jacques-François Thisse

Publication Date: November 2007

Keyword(s): entrepreneurship , trade liberalization , externality , heterogeneity , stability

JEL(s): F12 , F16 , J24 , O14 , R12

Programme Areas: Industrial Organization , International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP6567.asp.asp

This paper investigates the impacts of progressive trade openness, technological externalities, and heterogeneity of individuals on the formation of entrepreneurship in a two-country occupation choice model. We show that trade opening gives rise to a non-monotonic process of international specialization, in which the share of entrepreneurial firms in the large (small) country first increases (decreases) and then decreases (increases), with the global economy exhibiting first de-industrialization and then re-industrialization. When countries have the same size, we also show that strong technological externalities make the symmetric equilibrium unstable, generating equilibrium multiplicity, while sufficient heterogeneity of individuals leads to the stability and uniqueness of the symmetric equilibrium.