Regional Technological Capacity and Entrepreneurship: Heterogeneous Agents and Occupational Choice in a Directed Search Market

Abstract

The paper presents and analyses a general equilibrium occupational choice model with labour market frictions and heterogeneous agents. The main theoretical contribution of this model is that, unlike previous directed search models, it allows agents to self-select not only into different sectors but also into an entrepreneurial/managerial career or a regular employment career. Making use of a stochastic output and of positive assortative matching, the model gives rise to possible equilibria where the highest ability agents become either workers or entrepreneurs/managers in the technologically intensive sector. Considering the equilibrium where workers are drawn from the middle of the ability distribution, I find that, consistent with stylized facts, an increased regional technological development increases both top income inequality and the entrepreneurship rate in the technologically intensive sector.