Network Effect, Business Dynamism and Wage Inequality in a Sharing Economy

Abstract This paper examines the network effect on income distribution and social welfare in a sharing economy with rural-urban migration. A rise in the urban network effect via an increase of the number of users attracts capital to the urban sector. Urban skilled wage rises but rural unskilled wage falls. Due to rising costs from capital rental and skilled wage, urban firms exit if the demand elasticity of urban goods is large. This business-dynamism effect via firm exit mitigates the skilled-unskilled wage gap in the long run. Furthermore, rural-urban migration is mitigated from business dynamism by relocating capital to the rural sector. Network effects thus serves as a mitigator to cope with urban unemployment. In addition, the role of network effects on the effects of changes in the endowments are examined in the sharing economy.