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

Frank Fossen

No 705, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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: J23 H24 D81 C51 (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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