Is Business Failure Due to Lack of Effort? Empirical Evidence from a Large Administrative Sample

Authors


  • This article makes use of the ‘CAM 10% sample’. We thank the Danish Social Science Research Council (FSE) for financial support of the first author, Netspar for financial support of the second author, and Statistics Denmark for providing access to the data. Insightful comments from Jaap Abbring, Rob Alessie, Annette Bergemann, Martin Browning, Daniel Hallberg, Bo Honoré, Maarten Lindeboom, and Frederic Vermeulen as well as participants at the RTN AGE Meeting in Paris, the COST Meeting at IFS London, the CEBR Conference on Entrepreneurship in Copenhagen, Netspar Workshops at Groningen and Utrecht, a RWI (Essen) workshop, the CAM Summer Workshop, Econometric Society Meetings at Duke and Budapest, the EALE conference Oslo and seminar audiences at the Copenhagen Business School, the Universities of Cambridge, Copenhagen, and VU University Amsterdam helped in improving the article. We are grateful to the editor, Rachel Griffith, and two anonymous referees for a number of constructive comments and suggestions. Pernille Jessen and Sofie Bødker provided excellent research assistance.

Abstract

Does insurance provision reduce entrepreneurs' effort to avoid business failure? We exploit unique features of the voluntary Danish unemployment insurance (UI) scheme, that is available to the self-employed. Using a large sample of self-employed individuals, we estimate the causal effect of insurance choice on the probability to become unemployed. Identification of the insurance choice comes from eligibility conditions for an early retirement plan, accessible only to UI members. We find that those who are insured are 2 percentage points more likely to become unemployed subsequently compared with the uninsured, however only 0.6 percentage points are caused by moral hazard.

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