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Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample

  • Mette Ejrnæs

    (Department of Economics, University of Copenhagen)

  • Stefan Hochguertel

    (AKF, Danish Institute of Governmental Research)

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-employeds’ 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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File URL: http://www.econ.ku.dk/cam/wp0910/wp0708/2008-02.pdf/
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Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2008-02.

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Length: 43 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:kud:kuieca:2008_02
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  19. Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 100-144, February.
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