Entrepreneurship and Market Size: The Case of Young College Graduates in Italy

Abstract

We analyze empirically the effects of urban agglomeration on Italian college graduates’ work possibilities as entrepreneurs three years after graduation. We find that each 100,000 inhabitant-increase in the size of the individual’s province of work reduces the chances of being an entrepreneur by 0.2 percent. This result is robust to controlling for regional fixed effects and to instrumenting urbanization with three different sets of instruments. However, a positive urbanization externality emerges after taking into account urban amenities and dis-amenities, and, above all, provinces’ competition and cost of labor. In this case, every 100,000 inhabitant increase raises the chance of entrepreneurship by 2.4 percent. Finally, as long as they succeed in entering the largest markets, young entrepreneurs are able to reap-off the benefits of urbanization externalities: every 100,000-inhabitant increase in the province’s population raises entrepreneurs’ net hourly income by 0.2 percent.