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

Mette Ejrnæs and Stefan Hochguertel ()

No 2008-02, CAM Working Papers from University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics

Abstract: 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.

Keywords: entrepreneurs; self-employment; early retirement; unemployment insurance; moral hazard; Denmark; panel data (search for similar items in EconPapers)
JEL-codes: C33 D12 D14 D91 J23 J26 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2008-07
New Economics Papers: this item is included in nep-cta and nep-ias
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