Location and entrepreneurship: insights from a spatially-explicit occupational choice model with an application to Chile

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.