No. 775 - Entrepreneurship and market size. The case of young college graduates in Italy

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by Sabrina Di Addario and Daniela VuriOctober 2010

We analyse empirically the effects of urbanization on Italian college graduates' work possibilities as entrepreneurs three years after graduation. We find that doubling the province of work's population density reduces the chances of being an entrepreneur by 2-3 percentage points.

This result holds after controlling for regional fixed effects and is robust to instrumenting urbanization. Provinces' competition, urban amenities and dis-amenities, cost of labour, earning differentials between employees and self-employed workers, unemployment rates and value added per capita account for more than half of the negative urbanization penalty.

Our result cannot be explained by the presence of negative differentials in returns to entrepreneurship between the most and the least densely populated areas either. In fact, as long as they succeed in entering the most densely populated markets, young entrepreneurs are able to reap-off the benefits of urbanization externalities: doubling the province of work's population density increases entrepreneurs' net monthly earnings by 2-3 percent.

Published in 2010 in: Labour Economics, v. 17, 5, pp. 848-858

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