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

Tinbergen Institute Discussion Paper No. 08-065/3

Posted: 15 Jul 2008

See all articles by Mette Ejrnaes

Mette Ejrnaes

University of Copenhagen - Department of Economics

Stefan Hochguertel

VU University Amsterdam; Tinbergen Institute

Date Written: July 15, 2008

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

JEL Classification: C33, D12, D14, D91, J23, J26

Suggested Citation

Ejrnes, Mette and Hochguertel, Stefan, Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample (July 15, 2008). Tinbergen Institute Discussion Paper No. 08-065/3, Available at SSRN: https://ssrn.com/abstract=1160134

Mette Ejrnes (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35323062 (Phone)
+45 35323064 (Fax)

Stefan Hochguertel

VU University Amsterdam ( email )

Dept Econ (FEWEB)
De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 59 86033 (Phone)
+31 20 59 89870 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
374
PlumX Metrics