Chandlerian Firms vs Entrepreneurship: Implications for the Organization of Industries

In our model the skilled workers (e.g. managers) can be employed by the established (Chandlerian) firms or they can set-up their own firm. We obtain two equilibria where either the entrepreneurial sector does not arise or most of the skilled workers found their own firms. The Chandlerian equilibrium exhibits lower inequality in earnings between skills and more diversified large companies. Lower inequality arises because the entrepreneurial sector is skill-intensive, whilst in the Chandlerian firms the skilled workers increase the productivity of the less skilled ones. Diversification arises because in the Chandlerian world the skilled people are a major source of firm-level economies of scope in the large companies. We provide evidence by comparing two quintessential examples: Silicon Valley and Detroit. We provide additional evidence from other US metropolitan areas.