Seminar: Mette Ejrnæs, Copenhagen University

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

Abstract:

We consider risk behavior of 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). The setting applies to Denmark, where additional incentives to buy insurance contracts are present by way of allowing participation in 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 in these institutional features 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 not more likely to transit into unemployment than the uninsured, once we properly instrument for the insurance choice.