The Heterogeneous Self-Employed in Occupational Choice Models with Market Frictions

Abstract

The self-employed and entrepreneurs form a heterogeneous group: some individuals are pushed to become self-employed because they cannot find a job as employees, while others voluntarily choose self-employment to exploit business opportunities; among those who choose by opportunity, some hire employees, while others do not. This paper models market equilibrium from occupational choices in economies with market frictions and solves for conditions that can explain the observed heterogeneity among self-employed individuals. It also provides comparative static analysis of changes in the equilibrium results of both self-employment rates and output, from changes in the technological, institutional and organizational factors determining market equilibrium. The results can explain certain puzzling empirical findings reported in the literature about the relationships between self-employment and economic development. This paper provides additional empirical evidence on the U-shaped relationship between skills and entrepreneurial rates with Spanish data, and documents the growing number of voluntary own account self-employed.