Entrepreneurship and Social Security

In an occupational choice framework individuals can either become entrepreneurs (risky income) or employed workers (safe income). Their choice is affected by the design of the pension system which discriminates between entrepreneurs and workers. We explore the comparative statics of several pension parameters on the occupational equilibrium, assess the normative properties of the equilibrium, and discuss some policy issues. We find that seemingly identical pension provisions may have quite different effects, depending on whether applied to entrepreneurs or to workers. Entrepreneurs and workers should be treated differently in social security schemes. No general rule that entrepreneurs need insurance for old-age income less (or more) urgently than workers can be established. Splitting wage-related social security contributions between workers and entrepreneurs is not welfare-neutral.