Numerical analysis of entrepreneurial policy

Abstract

It is commonly criticized that some international organizations prescribe similar policies to countries with similar wealth levels. This paper shows the importance of the differences in the distribution of wealth in the design of policies. I focus on an occupational choice model developed by Inci (2008). After establishing the existence of a general equilibrium for a specific wealth distribution, I run numerical comparative statics exercises in order to analyze the effects of tax-subsidy policies on self-selection of entrepreneurs and welfare. The government runs under a balanced-budget regime. The base exercise considers an economy in which a tax on entrepreneurs used to subsidize workers improves self-selection and welfare. I then apply a mean-preserving spread on the wealth distribution that keeps total wealth (which is equal to the average wealth in the model) fixed. As a result of the spread in the wealth distribution, a tax on workers used to subsidize entrepreneurs becomes welfare improving.