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Long-term care policy, myopia and redistribution

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  • Cremer, Helmuth
  • Roeder, Kerstin

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 di¤er 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 rst-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 tradeo¤ 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 rst-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 su¢ ciently 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 Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 723.

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Date of creation: Nov 2011
Date of revision: May 2012
Publication status: Published in Journal of Public Economics, vol.�108, 2013, p.�33-43.
Handle: RePEc:ide:wpaper:25855

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  1. Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 143-165, December.
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Citations

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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. 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).
  3. CREMER, Helmuth & PESTIEAU, Pierre & PONTHIERE, Grégory, . "The economics of long-term care: a survey," CORE Discussion Papers RP -2466, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Masaya Yasuoka, 2013. "Subsidies for Elderly Care in Pay-As-You-Go Pension," Discussion Paper Series 109, School of Economics, Kwansei Gakuin University, revised Sep 2013.

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