Insuring entrepreneurial downside risk

This paper examines the effects of entrepreneurial downside risk insurance on the level and composition of the entrepreneurial pool and to a larger extent on unemployment, production and welfare. We build a rich theoretical framework combining occupational choice, heterogenous agents and incomplete markets to address our main policy concerns. Using CPS, SCF and SBO data, we match our economy to fundamental empirical elements on unemployment, entrepreneurship and mobility and provide contributions on the transition between occupations with respect to individual ability such as matching the U-shaped curve of the transition from worker to self-employed or the hump-shaped curve of the reverse transition. Depending on the downside risk insurance policy considered, we find that this insurance can have a significative impact not only on the level of entrepreneurship but also on the firm size in the entrepreneurial pool and production, although the impact on unemployment is modest.