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

Frank Fossen

No 29, SOEPpapers on Multidisciplinary Panel Data Research from DIW Berlin, The German Socio-Economic Panel (SOEP)

Abstract: 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.

Keywords: Entrepreneurship; Risk; Returns to Self-Employment; Taxation (search for similar items in EconPapers)
JEL-codes: C51 D81 H24 J23 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-ent and nep-pub
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