Occupational Choice and Income Inequalities under Regional Integration

In a setting with occupational choice and trade between two asymmetric regions, this paper explores the impact of market size and economic integration on both regional inequality and local income inequality within each region. It is shown that market access in a region affects income inequality measures, working through the cutoff productivity for entrepreneurship. Compared with the smaller region, selection into entrepreneurship is more likely for individuals in the larger region with better firm market access whereas the local income inequality is higher. Both regional inequality and regional disparities in the local income inequality measures exhibit an inverted U-shaped pattern when the regional integration level increases.