Entrepreneurship and Occupational Choice in the Global Economy Entrepreneurship and Occupational Choice in the Global Economy

By Federico Díez and Ali K. Ozdagli

This paper studies the effects of trade barriers on entrepreneurship. We first reveal a previously unknown fact: the higher the trade costs, the smaller the fraction of entrepreneurs. This fact holds across countries and across industries within the United States. To analyze this fact, we develop a model of international trade with occupational choice, borrowing elements from Lucas (1978) and Melitz (2003). The model delivers three new predictions, refining the relationship between entrepreneurship and trade costs: (i) domestic entrepreneurship increases with the trade costs of exporting from a foreign country to the home country, (ii) domestic entrepreneurship increases with the trade costs of exporting to the foreign country, and (iii) higher levels of entrepreneurship are associated with a lower fraction of exporting firms. We confirm these predictions using cross-country, cross-industry, and individual-level data.

Originally titled "Self-Employment in the Global Economy," this paper was revised in June 2013.