Entrepreneurial Moral Hazard in Income Insurance

Mette Ejrnaes, Stefan Hochguertel

Research output: Working paperProfessional

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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-employed's 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.
Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Instituut
Publication statusPublished - 2008

Publication series

NameDiscussion paper TI
No.08-065/3

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  • Cite this

    Ejrnaes, M., & Hochguertel, S. (2008). Entrepreneurial Moral Hazard in Income Insurance. (Discussion paper TI; No. 08-065/3). Amsterdam: Tinbergen Instituut.