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

We study entrepreneurs’ behavioral responses of effort (moral hazard) to avoid business failure.This is done in the context of an unemployment insurance scheme for self-employed, where we estimate how much of the transition probability to unemployment can be causally attributed to being insured. To disentangle moral hazard from adverse selection we use an institutional feature of the Danish unemployment system that provides an additional motive to choose insurance (an early retirement option). We estimate a bivariate random effects probit on a self-employment sample drawn from register data. We find that those who are insured are 2 percentage points more likely to subsequently become unemployed compared to the uninsured, however only 0.6percentage points can be attributed to behavioral responses.