Entrepreneurial Moral Hazard in Income Insurance

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.