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Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany

  • Frank M. Fossen

Which role do individual income prospects play in the decision to be an entrepreneur rather than an employee? In a model of occupational choice, higher expected after-tax earnings attract people to self-employment, while more risky net earnings deter risk-averse individuals. In this paper I analyse the expected value and variance of income in self-employment and dependent employment empirically, accounting for selection. Based on this analysis, structural models of self-employment entry and exit under risk are estimated, which include a standard risk aversion parameter. The model predicts that the German income tax reduction of 2000 induced smaller exit rates out of self-employment for men and smaller entry rates for women.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.61947.de/diw_sp0029.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 29.

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Length: 35 p.
Date of creation: 2007
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp29
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