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Home equity commitment and long-term care insurance demand

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  • Davidoff, Thomas

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.

Suggested Citation

  • Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
  • Handle: RePEc:eee:pubeco:v:94:y:2010:i:1-2:p:44-49
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    References listed on IDEAS

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    1. 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.
    2. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    3. 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.
    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, 2016. "Consumption Commitments and Habit Formation," Econometrica, Econometric Society, vol. 84, pages 855-890, March.
    6. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2008. "Consumption Commitments and Employment Contracts," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 559-578.
    7. Steven F. Venti & David A. Wise, 2000. "Aging and Housing Equity," NBER Working Papers 7882, National Bureau of Economic Research, Inc.
    8. 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.
    9. 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.
    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. Pauly, Mark V, 1990. "The Rational Nonpurchase of Long-term-Care Insurance," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 153-168, February.
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    Citations

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    Cited by:

    1. Yogo, Motohiro, 2016. "Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 17-34.
    2. John Gathergood & Eleonora Fichera, "undated". "House Prices, Home Equity and Health," Discussion Papers 12/07, University of Nottingham, School of Economics.
    3. Savannah Bergquist & Joan Costa-i-Font & Katherine Swartz, 2015. "Long Term Care Partnerships: Are they 'Fit for Purpose'?," CESifo Working Paper Series 5155, CESifo Group Munich.
    4. Costa-Font, Joan & Frank, Richard & Swartz, Katherine, 2017. "Access to long-term care after a wealth shock: evidence from the housing bubble and burst," LSE Research Online Documents on Economics 84212, London School of Economics and Political Science, LSE Library.
    5. Paciorek, Andrew & Sinai, Todd, 2012. "Does home owning smooth the variability of future housing consumption?," Journal of Urban Economics, Elsevier, vol. 71(2), pages 244-257.
    6. Stephanie Moulton & Donald Haurin & Samuel Dodini & Maximilian D. Schmeiser, 2016. "How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households," Working Papers wp351, University of Michigan, Michigan Retirement Research Center.
    7. Raun Ooijen & Rob Alessie & Adriaan Kalwij, 2015. "Saving Behavior and Portfolio Choice After Retirement," De Economist, Springer, vol. 163(3), pages 353-404, September.
    8. repec:eee:jhecon:v:53:y:2017:i:c:p:38-52 is not listed on IDEAS
    9. Chan, Sewin & Haughwout, Andrew & Tracy, Joseph, 2015. "How Mortgage Finance Affects the Urban Landscape," Handbook of Regional and Urban Economics, Elsevier.
    10. repec:bla:jfinan:v:72:y:2017:i:3:p:1171-1212 is not listed on IDEAS
    11. Moulton, Stephanie & Dodini, Samuel & Haurin, Donald R. & Schmeiser, Maximilian D., 2015. "How House Price Dynamics and Credit Constraints affect the Equity Extraction of Senior Homeowners," Finance and Economics Discussion Series 2015-70, Board of Governors of the Federal Reserve System (U.S.).
    12. Davidoff, Thomas & Gerhard, Patrick & Post, Thomas, 2017. "Reverse mortgages: What homeowners (don’t) know and how it matters," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 151-171.
    13. Raj Chetty & László Sándor & Adam Szeidl, 2017. "The Effect of Housing on Portfolio Choice," Journal of Finance, American Finance Association, vol. 72(3), pages 1171-1212, June.
    14. Daniel Gottlieb & Olivia S. Mitchell, 2015. "Narrow Framing and Long-Term Care Insurance," Working Papers wp321, University of Michigan, Michigan Retirement Research Center.

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    Keywords

    Health care markets Housing;

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