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Long Term Care Insurance with State-Dependent Preferences

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  • Philippe De Donder
  • Marie-Louise Leroux

Abstract

We study the demand for actuarially fair Long Term Care (LTC hereafter) insurance in a setting where autonomous agents only care for daily life consumption while dependent agents also care for LTC expenditures. We assume that dependency decreases the marginal utility of daily life consumption. We first obtain that some agents optimally choose not to insure themselves, while no agent wishes to buy complete insurance. We then show that the comparison of marginal utility of income (as opposed to consumption) across health states depends on (i) whether agents do buy LTC insurance at equilibrium or not, (ii) the comparison of the degree of risk aversion for consumption and for LTC expenditures, and (iii) the income level of agents. Our results then offer testable implications that can explain (i) why few people buy Long Term Care insurance and (ii) the discrepancies between various empirical works when measuring the extent of state-dependent preferences for LTC.

Suggested Citation

  • Philippe De Donder & Marie-Louise Leroux, 2019. "Long Term Care Insurance with State-Dependent Preferences," CESifo Working Paper Series 8017, CESifo.
    • Handle: RePEc:ces:ceswps:_8017
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    3. Marie‐Louise Leroux & Pierre Pestieau, 2023. "Age‐ and health‐related non‐linear inheritance taxation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 897-912, August.

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    More about this item

    Keywords

    long term care insurance puzzle; actuarially fair insurance; risk aversion;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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