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Home equity commitment and long-term care insurance demand

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  • Davidoff, Thomas
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    Abstract

    This paper shows how home equity may substitute for long-term care insurance (LTCI). The elderly commonly hold substantial wealth in the form of home equity that is rarely spent before death, except for after moves to long-term care facilities. Absent strong bequest motives implies that marginal utility fluctuates less across health states than one would predict based on a standard model without wealth tied up in housing. Numerical examples show that this "asset commitment" may substantially weaken LTCI demand.

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    File URL: http://www.sciencedirect.com/science/article/B6V76-4XBG17Y-1/2/7454bb1f43081b6bd02fe86de4c3d416
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 94 (2010)
    Issue (Month): 1-2 (February)
    Pages: 44-49

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    Handle: RePEc:eee:pubeco:v:94:y:2010:i:1-2:p:44-49

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    Web page: http://www.elsevier.com/locate/inca/505578

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    Keywords: Health care markets Housing;

    References

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    1. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2001. "Consumption Commitments and Employment Contracts," PIER Working Paper Archive 06-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 14 Jan 2006.
    2. Stephen H. Shore & Todd Sinai, 2010. "Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 408-424, May.
    3. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 831-877, 05.
    4. Steven F. Venti & David A. Wise, 1989. "Aging, Moving, and Housing Wealth," NBER Chapters, in: The Economics of Aging, pages 9-54 National Bureau of Economic Research, Inc.
    5. Raj Chetty & Adam Szeidl, 2004. "Consumption Commitments: Neoclassical Foundations for Habit Formation," NBER Working Papers 10970, National Bureau of Economic Research, Inc.
    6. Steven F. Venti & David A. Wise, 2000. "Aging and Housing Equity," NBER Working Papers 7882, National Bureau of Economic Research, Inc.
    7. Pauly, Mark V, 1990. "The Rational Nonpurchase of Long-term-Care Insurance," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 153-68, February.
    8. Norton, Edward C., 2000. "Long-term care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 17, pages 955-994 Elsevier.
    9. Jonathan S. Skinner, 1996. "Is Housing Wealth a Sideshow?," NBER Chapters, in: Advances in the Economics of Aging, pages 241-272 National Bureau of Economic Research, Inc.
    10. Lina Walker, 2004. "Elderly Households and Housing Wealth: Do They Use It or Lose It?," Working Papers wp070, University of Michigan, Michigan Retirement Research Center.
    11. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center.
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    Cited by:
    1. Raj Chetty & Adam Szeidl, 2010. "The Effect of Housing on Portfolio Choice," NBER Working Papers 15998, National Bureau of Economic Research, Inc.
    2. Andrew Paciorek & Todd M. Sinai, 2010. "Does Home Owning Smooth the Variability of Future Housing Consumption?," NBER Working Papers 16531, National Bureau of Economic Research, Inc.
    3. John Gathergood & Eleonora Fichera, . "House Prices, Home Equity and Health," Discussion Papers 12/07, University of Nottingham, School of Economics.

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