Working Paper: NBER ID: w25651
Authors: Youssef Benzarti; Jarkko Harju; Tuomas Matikka
Abstract: This paper estimates the effect of relaxing the social insurance mandate on entrepreneurial activity. We use a unique discontinuity in Finland that allows certain entrepreneurs not to pay social insurance contributions on their income. Using rich administrative data, we find that relaxing the social insurance mandate leads entrepreneurs to significantly reduce their contributions, which they channel instead into their firms. While young firms use this windfall to increase business activity, older ones use it to improve their net lending position by purchasing stocks. Our results imply that the social insurance mandate is binding and its efficiency cost is heterogeneous.
Keywords: social insurance; entrepreneurship; Finland; business activity; differences-in-differences
JEL Codes: H25; H32; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relaxing the social insurance mandate (G52) | Reduction in social insurance contributions by entrepreneurs (L26) |
| Reduction in social insurance contributions by entrepreneurs (L26) | Increased employee compensation and turnover for younger firms (J39) |
| Reduction in social insurance contributions by entrepreneurs (L26) | Improved net lending position through increased stock holdings for older firms (G32) |
| Ownership share threshold change from 50% to 30% (G34) | Greater discretion over social insurance contributions for owners with 30-50% stake (J54) |
| Treatment and control groups exhibited similar outcomes prior to the reform (C90) | Validity of parallel trends assumption (C22) |