Is business failure due to lack of effort? Empirical evidence from a large administrative sample

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.