Underinsured Entrepreneurs: Contribution Evasion in YEL Insurance

Abstract

In this thesis, we study identified entrepreneurs' underinsurance phenomenon in a contribution evasion framework. Contribution evasion is an applied field of the broader tax evasion research where the tradition is to apply an economic approach to evasion decisions. We develop a new model inspired by Perotti ́s modification of the Allingham Sandmo model where an entrepreneur is assumed to maximize her utility by minimizing her pension contributions. In the testing part, we assess whether entrepreneurs' financial and health condition impacts their pension contribution evasion rate. We also try to view contribution evasion as a gambling activity where evading risk-seeking entrepreneurs are betting not to need social insurance benefits. Due to financial constraints, we could not get the survey data from the Statistics Finland we wanted. Without the data, we could not assess the background factors influence on the evasion rate. The theoretical contribution of this study is our developed evasion model and to position underinsurance as a contribution evasion phenomenon, which is a rare point of view in Finland. With the model and literacy, provided in this thesis it is possible to examine entrepreneurs' lifetime incentives to contribute to the pension scheme. We hope this study motivates researchers to use microeconomics methods to assess entrepreneurs' motivation to save for retirement and to develop pension schemes.