Moral Hazard and Adverse Selection in the Social Insurance Market for Entrepreneurs

This paper studies social insurance contribution choices, adverse selection, and moral hazard among Finnish entrepreneurs. We exploit quasi-exogenous variation from a reform that relaxed mandatory contribution requirements for a subset of entrepreneurs, combining administrative registry data with linked survey evidence. Entrepreneurs who gained discretion reduced their contributions by 16%, on average, relative to entrepreneurs subject to a strict mandate.

Using this variation, causal tests of anticipatory responses and moral hazard as well as positive correlation tests, we show that moral hazard and adverse selection effects are near zero in this market. Survey responses help illuminate the mechanisms underlying these results.