Entrepreneurship and Occupational Choice in the Global Economy

We present a new fact: the higher the trade costs, the larger the fraction of entrepreneurs. We develop a model of international trade with occupational choice that delivers three new predictions as a refinement of this relationship, which are supported by the data: (i) entrepreneurship increases with the cost of importing, (ii) entrepreneurship increases with the cost of exporting, (iii) higher levels of entrepreneurship are associated with a lower fraction of exporting firms. Finally, the model predicts an increase in income inequality between entrepreneurs and workers as trade costs decrease, and we show that this is consistent with the data