Entrepreneurship and market size: the case of young college graduates in Italy

We analyse empirically the effects of urbanization on Italian college graduates' work possibilities as entrepreneurs three years after graduation. We !nd 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 !xed 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 entirely explained by the presence of negative differentials in returns to entrepreneurship between the most and the least denselypopulated areas. In fact, as long as they succeed in entering themost densely populated markets, young entrepreneurs are able to reap-off the bene!ts of urbanization externalities: the elasticity of entrepreneurs' net monthly earnings with respect to population density is 0.02–0.03.