Inflation as a bad incentive to self-employment

Abstract

This work develops an occupational choice model with the aim of studying the relationship between inflation and creation of self-employment. Particularly, it studies the decision of an agent between being a waged employee or being an entrepreneur, and how this decision changes according to the level of inflation in the economy. The model distinguishes between two types of firm owners: low skilled (subsistence entrepreneurs) and high-skilled (transformational entrepreneurs). While the last ones are thought to develop employment and economic growth, the first ones create their firms to subsist. According to the model, inflation creates an incentive to start a new firm for both types of entrepreneurs, but this effect is stronger for low-skilled entrepreneurs. Finally, this incentive to entrepreneurship has a negative impact in the economy.