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

TY - UNPB

T1 - Entrepreneurial Moral Hazard in Income Insurance

T2 - Empirical Evidence from a Large Administrative Sample

AU - Ejrnæs, Mette

AU - Hochguertel, Stefan

N1 - JEL classification: C33, D12, D14, D91, J23, J26

PY - 2008

Y1 - 2008

N2 - 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.

AB - 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.

KW - Faculty of Social Sciences

KW - entrepreneurs

KW - self-employment

KW - early retirement

KW - unemployment insurance

KW - Denmark

KW - panel data

M3 - Working paper

BT - Entrepreneurial Moral Hazard in Income Insurance

PB - Centre for Applied Microeconometrics. Department of Economics, University of Copenhagen

ER -