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Social Insurance and Entrepreneurship: The Effect of Unemployment Benefits on New-Business Formation

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  • Xu, Wenjian

    (Shanghai Jiao Tong University)

Abstract

This paper studies the impacts of social insurance on the decisions of unemployed individuals to start businesses. Exploiting staggered changes in benefit generosity across U.S. states and over time, I find that higher unemployment insurance (UI) benefits both lower the probability that an unemployed person will become self-employed, and also extend the length of time that passes before they make such a transition. The negative effects of UI benefits are concentrated on the formation of unincorporated businesses. Unincorporated businesses created by unemployed people in higher-benefit state-periods tend to be more successful, as measured by profit and survival rate, suggesting that higher benefits mainly screen out the entry of less productive firms. The negative effects are smaller during non-recession periods and in states that offer a Self-Employment Assistance program.

Suggested Citation

  • Xu, Wenjian, 2022. "Social Insurance and Entrepreneurship: The Effect of Unemployment Benefits on New-Business Formation," SocArXiv 5dahz_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:5dahz_v1
    DOI: 10.31219/osf.io/5dahz_v1
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