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

Discussion Papers 705, 35 S.

Frank M. Fossen

2007. Jul.

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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.

Topics: Firms

JEL-Classification: J23;H24;D81;C51
Keywords: Entrepreneurship, risk, returns to self-employment, taxation
Frei zugängliche Version: (econstor)