Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample

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We study risk behavior of Danish self-employed entrepreneurs, whose income risk may be driven by both exogenous factors and effort choice (moral hazard). Partial insurance is available through voluntary unemployment insurance (UI). Additional incentives to sign insurance contracts stem from a UI-embedded, government-subsidized early retirement (ER) program, giving benefits that are unrelated to business risk. Indeed, we argue that the self-employeds' incentives to insure themselves stem from the ER plan rather than from the UI cover. We show how to use a policy reform to identify moral hazard in observed transitions to unemployment when insurance is a choice variable. We use administrative (register) panel data covering 10% of the Danish population. We find that the insured are indeed more likely to transit into unemployment than the uninsured, once we properly instrument for the insurance choice.
Original languageEnglish
PublisherCentre for Applied Microeconometrics. Department of Economics, University of Copenhagen
Number of pages41
Publication statusPublished - 2008

    Research areas

  • Faculty of Social Sciences - entrepreneurs, self-employment, early retirement, unemployment insurance, Denmark, panel data

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