This paper presents an overlapping generations model with occupational choice that allows for entrepreneurial exit, entry and investment decisions in the presence of idiosyncratic productivity risk and borrowing constraints. The model is applied to analyze the consequences of three pension reforms in Germany: A move towards a comprehensive paygo system, the introduction of flat benefits, and a funded pension system. Our simulation results indicate that pension systems directly affect occupational choice when households have a choice to avoid the implied tax burden. In addition, pension systems influence indirectly through changes in financial constraints and factor prices. Direct and indirect effects may neutralize each other and we are able to separate them quantitatively. We also document that the pension system might have opposite effects on different types of entrepreneurs. Quite surprisingly, some pension reforms increase labor input in the corporate sector and entrepreneurial activities at the same time. Finally, pension reforms have a strong impact on wealth inequality in our set up. Consequently, occupational choice and the pension system are strongly interrelated and more research is needed to understand this connection.
