This paper examines the effect of wealth concentration on firms’ market power
when firm entry is driven by entrepreneurs facing uninsurable idiosyncratic risks. Under
greater wealth concentration, households in the lower end of the wealth distribution are
more risk averse and less willing (or able) to bear the risk of entrepreneurial activities.
This has implications for firm entry, competitiveness, and market power.
I calibrate a Schumpeterian model of endogenous growth with heterogeneous risk
averse entrepreneurs competing to catch up with firms. This model is unique in that
both household wealth distribution and a measure of firm markup are endogenously
determined on a balanced growth path. I find that a spread in the wealth distribution
decreases entrepreneurial firm creation, resulting in greater aggregate firm market
power. This result is supported by time series evidence obtained from the estimation
of a structural panel VAR with OECD data from eight countries.