Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany
39 Pages Posted: 21 Feb 2008
Date Written: August 2007
Abstract
Which role do individual income prospects play in the decision to be an entrepreneur rather than an employee? In a model of occupational choice, higher expected after-tax earnings attract people to self-employment, while more risky net earnings deter risk-averse individuals. In this paper I analyse the expected value and variance of income in self-employment and dependent employment empirically, accounting for selection. Based on this analysis, structural models of self-employment entry and exit under risk are estimated, which include a standard risk aversion parameter. The model predicts that the German income tax reduction of 2000 induced smaller exit rates out of self-employment for men and smaller entry rates for women.
Keywords: Entrepreneurship, Risk, Returns to Self-Employment, Taxation
JEL Classification: J23, H24, D81, C51
Suggested Citation: Suggested Citation
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