Location and Entrepreneurship: Insights From a Spatially‐explicit Occupational Choice Model With an Application to Chile

Abstract

Occupational choice and heterogeneous managerial ability enter a spatial Dixit-Stiglitz setting, linking location, wages and regional entrepreneurship rates. Market potential has a positive partial effect and wages a negative partial effect on the regional supply of entrepreneurs, both balancing in equilibrium with endogenous wages. Market potential increases profits, but also the opportunity cost of entrepreneurship. In the long-run equilibrium with perfect mobility, the cut-off level of ability determining selection into entrepreneurship will be the same across regions; moreover, regional differences in entrepreneurship rates depend only in differences in average fixed costs of firms. An empirical application is provided for Chile.Our model explicitly includes both push and pull mechanisms conditioning the spatial distribution of entrepreneurship. More specifically, we introduce occupational choice and heterogeneous managerial ability, two features of microeconomic theories of entrepreneurship (Parker, 2009), into the spatial Dixit-Stiglitz setting (Fujita et al., 1999). The resulting model predicts a positive partial effect of market potential, and a negative partial effect of domestic wages on the regional supply of entrepreneurs. But wages are also determined by the regional market potential, and so the model predicts, in the short-run equilibrium, offsetting effects of MP over the regional supply of entrepreneurs. The long-run equilibrium result, after full mobility of workers across regions and occupations, is that differences in entrepreneurship rates are given by differences in fixed costs across regions. We provide an empirical application of the model, by econometrically testing the offsetting effects of regional market potential on short-run changes in municipal entrepreneurship rates in Chile. The evidence supports the model's theoretical implications.Our model introduces several innovations to existing NEG-based models of location and entrepreneurship. First, in contrast to Sato et al. (2012), we incorporate and test for interregional demand linkages as an explanation for the spatial variation in entrepreneurship, using a supply equation relating regional entrepreneurship rates and the Helpman-Hanson's market potential function (Helpman, 1998;Hanson, 2005). Second, in contrast to what are known as "footloose entrepreneurs" models of agglomeration (e.g., Forslid and Ottaviano, 2003), where there is an exogenous stock of entrepreneurs choosing their location, our model focuses on the effects of regional MP in the individual's decision to become an entrepreneur. Third, unlike Sato et al. (2012), our model endogenizes both business profits and wages, both conditioning the selection into entrepreneurship. The model yields testable parameter restrictions reflecting the trade-offs between regional incentives and the opportunity costs of entrepreneurship. Finally, it incorporates entrepreneurs' heterogeneity, leading to the sensible implication that, ceteris paribus, less efficient firms can succeed in area...

Innovative Rural Entrepreneurship in Chile

“…In the case of Chile, Modrego et al (2014) confirm a positive relation between business density and market access, a measure combining proximity and the size of surrounding markets. In another study, Modrego et al (2017a) reinforce this finding from the perspective of nonagricultural self-employment rates. Their study demonstrates, however, that the benefits of greater market access are to some degree offset by higher wages (opportunity costs) in denser areas.…”

“…Recent studies have adapted these conceptual models to analyze the spatial patterns of entrepreneurship. Overall, they show that entrepreneurship responds to agglomeration economies and to selfreinforcing home market effects, a fact verified in diverse contexts such as Japan (Sato et al, 2012), Germany (Audretsch & Fritsch, 1994) and Chile (Modrego et al, 2014;2017a). In recent years, the academic literature has advanced the idea of a spatial sorting of entrepreneurship (Behrens et al, 2014;Behrens and Robert-Nicoud, 2015).…”

Agglomeration factors and the geography of growing early‐stage businesses in Chile

“…This means that, in the long-run spatial equilibrium, the rates of entrepreneurship are independent of region's level of agglomeration. In a similar vein, Modrego et al (2017), using a NEG-based spatial occupational choice model with heterogeneous agents, arrive at a perfectly offsetting effect between market size and wages, rendering the long-run equilibrium spatial distribution of entrepreneurship independent of market size. 3 We exclude entities that are not relevant for this study, such as non-for-profit organizations, public organizations, and building-administration communities.…”

“…In a similar vein, Modrego et al. (2017), using a NEG‐based spatial occupational choice model with heterogeneous agents, arrive at a perfectly offsetting effect between market size and wages, rendering the long‐run equilibrium spatial distribution of entrepreneurship independent of market size.…”

Entrepreneurship as an Occupational Choice

“…Entrepreneurship attracts employees with less chances of finding more attractive employment and those in less developed labour markets (Fitzpatrick, 2017). The level of wages in the given industry and their comparison against entrepreneurial profits is another factor, as one decides to become an entrepreneur only when entrepreneurial profits are at least as high as wages (Modrego et al, 2017).…”