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Social security and entrepreneurial activity

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    Abstract

    We solve the dynamic occupational choice problem of a finitelylived, borrowing constrained household which faces exogenously given stochastic wages and business returns. Entrepreneurship means investing personal wealth into a risky asset and neither receiving wage income nor paying social security contributions. Social security bene- fits in retirement depend on the number of contribution periods. We show that, entrepreneurial activity depends negatively on the generosity of the social security system and non-monotically on the size of the system. Numerical results for a multi-period version suggest that for reasonable parameter values the relationship between the size of the social security system and entrepreneurial activity is negative. In simulation experiments, we find that lowering social security contributions for the young has a relatively larger effect on entrepreneurial activity than other ways to reduce the size of the system.

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    Bibliographic Info

    Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 130.

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    Date of creation: 01 Jan 2005
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    Handle: RePEc:sef:csefwp:130

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    Keywords: Occupational choice; Life-cycle models; Social security;

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    1. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November.
    2. Hintermaier, Thomas & Steinberger, Thomas, 2002. "Occupational Choice and the Private Equity Premium Puzzle," Economics Series 122, Institute for Advanced Studies.
    3. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
    4. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
    5. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers.
    6. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
    7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    8. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    9. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    10. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
    11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
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