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Behavioral biases and long term care insurance: A political economy approach

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Author Info

  • DE DONDER, Philippe

    ()
    (Toulouse School of Economics (GREMAQ-CNRS and IDEI), France)

  • LEROUX, Marie-Louise

    ()
    (UQAM, Canada; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

Abstract

We develop a model where individuals all have the same probability of becoming dependent and vote over the social long term care insurance contribution rate before buying additional private insurance and saving. We study three types of behavioral biases, all having in common that agents under-weight their dependency probability when taking private decisions. Sophisticated procrastinators anticipate their mistake when voting, while optimistic and myopic agents have preferences that are consistent across choices. Optimists under-estimate their own probability of becoming dependent but know the average probability while myopics underestimate both. Sophisticated procrastinators attain the first-best allocation while myopics and optimists insure too little and save too much. Myopics and optimists more (resp., less) biased than the median are worse off (resp., better off), at the majority voting equilibrium, when private insurance is available than when it is not.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013020.

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Date of creation: 17 May 2013
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Handle: RePEc:cor:louvco:2013020

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Related research

Keywords: majority voting; myopia; optimism; sophisticated procrastinators; complementary private insurance; dependency linked annuity;

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  1. Pierre Pestieau & Grégory Ponthière, 2010. "Long term care insurance puzzle," PSE Working Papers halshs-00564862, HAL.
  2. CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, 2006. "Voting over type and generosity of a pension system when some individuals are myopic," CORE Discussion Papers 2006079, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. 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.
  4. Nuscheler, Robert & Roeder, Kerstin, 2013. "The political economy of long-term care," Munich Reprints in Economics 19324, University of Munich, Department of Economics.
  5. De Donder, Philippe & Pestieau, Pierre, 2011. "Private, social and self insurance for longterm care: a political economy analysis," IDEI Working Papers 719, Institut d'Économie Industrielle (IDEI), Toulouse, revised 25 Feb 2013.
  6. Ludwig, Alexander & Zimper, Alexander, 2007. "A Parsimonious Model of Subjective Life Expectancy," Sonderforschungsbereich 504 Publications 07-65, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  7. Jeffrey R. Brown & Amy Finkelstein, 2011. "Insuring Long-Term Care in the United States," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 119-42, Fall.
  8. Jeffrey R. Brown & Amy Finkelstein, 2008. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 98(3), pages 1083-1102, June.
  9. François Salanié & Nicolas Treich, 2009. "Regulation in Happyville," Economic Journal, Royal Economic Society, vol. 119(537), pages 665-679, 04.
  10. Markus Haavio & Kaisa Kotakorpi, 2009. "The Political Economy of Sin Taxes," CESifo Working Paper Series 2650, CESifo Group Munich.
  11. Cremer, Helmuth & Roeder, Kerstin, 2013. "Long-term care policy, myopia and redistribution," Munich Reprints in Economics 20065, University of Munich, Department of Economics.
  12. Les Mayhew & Martin Karlsson & Ben Rickayzen, 2010. "The Role of Private Finance in Paying for Long Term Care," Economic Journal, Royal Economic Society, vol. 120(548), pages F478-F504, November.
  13. Hamermesh, Daniel S, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 389-408, May.
  14. Brown, Jeffrey R. & Finkelstein, Amy, 2007. "Why is the market for long-term care insurance so small?," Journal of Public Economics, Elsevier, vol. 91(10), pages 1967-1991, November.
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  16. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  17. repec:hal:wpaper:halshs-00564862 is not listed on IDEAS
  18. 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.
  19. 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.
  20. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
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