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Long-Term Care Policy, Myopia and Redistribution

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  • Helmuth Cremer
  • Kerstin Roeder

Abstract

This paper examines whether myopia (misperception of the long-term care (LTC) risk) and private insurance market loading costs can justify social LTC insurance and/or the subsidization of private insurance. We use a two-period model wherein individuals differ in three unobservable characteristics: level of productivity, survival probability and degree of ignorance concerning the risk of LTC (the former two being perfectly positively correlated). The decentralization of a first-best allocation requires that LTC insurance premiums of the myopic agents are subsidized (at a “Pigouvian” rate) and/or that there is public provision of the appropriate level of LTC. The support for the considered LTC policy instruments is less strong in a second-best setting. When social LTC provision is restricted to zero, a myopic agent’s tax on private LTC insurance premiums involves a tradeoff between paternalistic and redistributive (incentive) considerations and we may have a tax as well as a subsidy on private LTC insurance. Interestingly, savings (which goes untaxed in the first-best but plays the role of self-insurance in the second-best) is also subject to (positive or negative) taxation. Social LTC provision is never second-best optimal when private insurance markets are fair (irrespective of the degree of the proportion of myopic individuals and their degree of misperception). At the other extreme, when the loading factor in the private sector is sufficiently high, private coverage is completely crowded out by public provision. For intermediate levels of the loading factors, the solution relies on both types of insurance.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3843.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3843

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Keywords: long-term care; myopia; optimal taxation;

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References

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  1. Cremer, Helmuth & De Donder, Philippe & Maldonado, Darío & Pestieau, Pierre, 2008. "Forced Saving, Redistribution and Nonlinear Social Security Schemes," CEPR Discussion Papers 6775, C.E.P.R. Discussion Papers.
  2. Gerdtham, Ulf-G. & Johannesson, Magnus, 1999. "Income-Related Inequality in Life-Years and Quality-Adjusted Life-Years," Working Paper Series in Economics and Finance 334, Stockholm School of Economics.
  3. Pierre Pestieau & Grégory Ponthière, 2012. "The public economics of increasing longevity," PSE Working Papers halshs-00676492, HAL.
  4. 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.
  5. CREMER, Helmuth & PESTIEAU, Pierre, 2011. "Social long term care insurance and redistribution," CORE Discussion Papers 2011024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. JOUSTEN, Alain & LIPSZYC, Barbara & MARCHAND, Maurice & PESTIEAU, Pierre, 2003. "Long-term care in insurance and optimal taxation for altruistic children," CORE Discussion Papers 2003063, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Jacobs, Bas, 2011. "The Marginal Cost of Public Funds is One," Working Paper Series, Center for Fiscal Studies 2011:7, Uppsala University, Department of Economics.
  8. Alain Jousten & Barbara Lipszyc & Maurice Marchand & Pierre Pestieau, 2005. "Long-term Care Insurance and Optimal Taxation for Altruistic Children," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 1-, March.
  9. Sloan, Frank A & Norton, Edward C, 1997. "Adverse Selection, Bequests, Crowding Out, and Private Demand for Insurance: Evidence from the Long-Term Care Insurance Market," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 201-19, December.
  10. Jeffrey R. Brown & Amy Finkelstein, 2009. "The Private Market for Long-Term Care Insurance in the United States: A Review of the Evidence," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 5-29.
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Cited by:
  1. De Donder, Philippe & Leroux, Marie-Louise, 2012. "Behavioral Biases and Long Term Care Annuities: A Political Economy Approach," IDEI Working Papers 749, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2013.
  2. CREMER, Helmuth & PESTIEAU, Pierre & PONTHIERE, Grégory, 2012. "The economics of long-term care: a survey," CORE Discussion Papers 2012030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. DE DONDER, Philippe & LEROUX, Marie-Louise, 2013. "Behavioral biases and long term care insurance: A political economy approach," CORE Discussion Papers 2013020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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