Imperfect Competition and Growth with Entrepreneurial Risk

This paper is analyzes a neoclassical overlapping generations model. We discuss a two-sector economy with intermediate and final goods in the spirit of Romer (1990). Agents engage in one of two alternative occupations: either self–employment in the intermediate goods sector, which is characterized by monopolistic competition, or employment as an ordinary worker in this sector. Entrepreneurial profits are stochastic. The occupational choice under risk endogenizes the number of firms and products in the intermediate goods industry. We find that expected profits of monopolists do not vanish in equilibrium and that the level of economic performance is inefficiently low due to the presence of risk. This result carries over to a suboptimally low growth rate in an enodgenous growth context. The heterogeneity of incomes also implies heterogeneity in the amounts saved. JEL classification: D4, D5, D8, D9, O4