Entrepreneurship, Labor Market Mobility and the Role of Entrepreneurial Insurance

Abstract

This paper introduces a quantitative model with risky entrepreneurship and search frictions matching the occupational flows between entrepreneurship, paid-employment, and unemployment. We account for the general shape of these flows and key entrepreneurial and labor market features based mostly on micro CPS and SCF data. Using this model, we show that an insurance providing Self-Employment Assistance (SEA) policy mitigates the bias disfavoring self-employment inherent in unemployment insurance programs. Moreover, ability-dependent SEA programs select more productive and wealthier new entrepreneurs out of unemployment. Finally, we show that the interaction between UI design and SEA programs has a significant impact on entrepreneurship.