Jon Stewart asks Austan Goolsbee:

What we need to do in this country is make it a softer cushion for failure. Because what they say is the job creators need more tax cuts and they need a bigger payoff on the risk that they take. … But what about the risk of, you’re afraid to leave your job and be an entrepreneur because that’s where your health insurance is? … Why aren’t we able to sell this idea that you don’t have to amplify the payoff of risk to gain success in this country, you need to soften the damage of risk?

I guess there are two effects. First, as Stewart says, insurance against failure, including in the form of health insurance disconnected from a salaried job, encourages more people to become entrepreneurs. This is the occupational choice component. Second, insurance against failure reduces the incentive to work hard. This is the usual trade-off between risk-sharing and incentives in the classical principal-agent moral hazard model. The two effects move in opposite directions so the net effect on welfare is ambiguous (assuming we want more people to be entrepreneurs which is not clear!). As far as I know, the empirical work on the trade off between risk sharing and incentives finds weak support for any tradeoff. It would be nice to have a model to think things through.  I assume someone must have written such a model but not sure of the reference.

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