Bidimensional heterogeneity in the models of occupational choice

<p style="margin: 0px; text-align: justify;">In this paper, we develop a theoretical model to revisit the underlying factors inducing heterogeneous individuals to become entrepreneurs. Striving to eliminate the crucial drawbacks that arise in previous research, we embed a model of occupational choice with bidimensional heterogeneity of individuals into a monopolistic competition framework. Apart from being more realistic, these assumptions allow for fuzzy patterns of selection into entrepreneurship consistent with recent empirical evidence.</p><p style="margin: 0px;">&nbsp;</p><p style="margin: 0px;">Individuals are heterogeneous along two dimensions: productivity and entrepreneurial talent. Comparing the expected pay-offs from the two occupations, they opt for either paid employment or entrepreneurship. The bidimensional nature of the model allows us to establish a series results that deepen our knowledge on the economics of entrepreneurship. First, we derive an endogenous cut-off rule of selection into entrepreneurship. Second, we prove that four major types of employment structure, which describe the coexistence of ``out of opportunity&#39;&#39; and ``out of necessity&#39;&#39; entrepreneurs, can occur. Moreover, we show that the share of entrepreneurs does not depend on the absolute level of abilities observed in the economy, but instead on the ranges of these abilities, i.e. relative level.</p><p style="margin: 0px;">&nbsp;</p><p style="margin: 0px;">In the empirical part, we look for the existence of stylized facts that are in line with our theoretical findings, using self-employment as a working definition of entrepreneurship. We use several proxy variables for unobserved productivity and entrepreneurial talent, applying among others propensity score matching. Our key result is that, in accord with the model, the cut-off curve is downward sloping, meaning that propensities of being a paid employee and an entrepreneur are inversely related.</p><p style="margin: 0px;">&nbsp;</p><p style="margin: 0px;">We conclude by tentatively discussing possible migration policy applications regarding the recent US government bills.</p>