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Entrepreneurial Moral Hazard in Income Insurance

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Author Info
Mette Ejrnaes () (Copenhagen University)
Stefan Hochguertel () (VU University Amsterdam)

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Abstract

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-employed's 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.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-065/3.

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Date of creation: 14 Jul 2008
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Handle: RePEc:dgr:uvatin:20080065

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: entrepreneurs; self-employment; early retirement; unemployment insurance; moral hazard; Denmark; panel data;

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D14 - Microeconomics - - Household Behavior - - - Personal Finance
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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