Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany

39 Pages Posted: 21 Feb 2008

See all articles by Frank M. Fossen

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

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

Fossen, Frank M., Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany (August 2007). SOEPpaper No. 29, Available at SSRN: https://ssrn.com/abstract=1096142 or http://dx.doi.org/10.2139/ssrn.1096142

Frank M. Fossen (Contact Author)

University of Nevada, Reno ( email )

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HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

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