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Entrepreneurial Moral Hazard in Income Insurance

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  • Mette Ejrnaes

    ()
    (Copenhagen University)

  • Stefan Hochguertel

    ()
    (VU University Amsterdam)

Abstract

We study entrepreneurs’ behavioral responses of effort (moral hazard) to avoid business failure.This is done in the context of an unemployment insurance scheme for self-employed, wherewe estimate how much of the transition probability to unemployment can be causally attributedto being insured. To disentangle moral hazard from adverse selection we use an institutional featureof the Danish unemployment system that provides an additional motive to choose insurance(an early retirement option). We estimate a bivariate random effects probit on a self-employmentsample drawn from register data. We find that those who are insured are 2 percentage pointsmore likely to subsequently become unemployed compared to the uninsured, however only 0.6percentage points can be attributed to behavioral responses.

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Bibliographic 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
Date of revision: 12 Aug 2011
Handle: RePEc:dgr:uvatin:20080065

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Keywords: moral hazard; entrepreneurs; self-employment; unemployment insurance; panel data;

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