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Behavioral Biases and Long Term Care Annuities: A Political Economy Approach

  • Philippe De Donder
  • Marie-Louise Leroux

We build a political economy model where individuals differ in the extent of the behavioral bias they exhibit when voting first over social long-term care (LTC) insurance and then choosing the amount of LTC annuities. LTC annuities provide a larger return if dependent than if healthy. We study the majority voting equilibrium under three types of behavioral biases: myopia, optimism and sophisticated procrastination. Optimists and myopics similarly under-estimate their own dependency risk both when voting and when buying LTC annuities. They differ in that optimists know the correct average dependency risk (that determines the return of both social and private insurance), while myopics also under-estimate this average risk (and thus over-estimate the insurance return). Sophisticated procrastinators act as if they under-estimated their own risk when buying annuities, but anticipate this bias at the time of voting.We obtain that the stylized observation of lack of LTC insurance is compatible with agents being optimistic or myopic, but not sophisticated procrastinators. Increasing the difference in return across dependency states for the LTC annuity is detrimental to sophisticated voters and to very biased myopic and optimist voters. Finally, less myopic individuals may end up worse off, at the majority-voting equilibrium, than more myopic agents, casting some doubt on the usefulness of information campaigns.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3972.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3972
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  1. 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.
  2. 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 Jun 2014.
  3. Markus Haavio & Kaisa Kotakorpi, 2009. "The Political Economy of Sin Taxes," CESifo Working Paper Series 2650, CESifo Group Munich.
  4. Cremer, Helmuth & De Donder, Philippe & Maldonado, Dario & Pestieau, Pierre, 2007. "Voting over type and generosity of a pension system when some individuals are myopic," Journal of Public Economics, Elsevier, vol. 91(10), pages 2041-2061, November.
  5. A. Ludwig & A. Zimper, 2013. "A parsimonious model of subjective life expectancy," Theory and Decision, Springer, vol. 75(4), pages 519-541, October.
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  8. 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.
  9. 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.
  10. 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.
  11. Aldashev, Gani & Baland, Jean-Marie, 2012. "Awareness and AIDS: A Political Economy Perspective," CEPR Discussion Papers 8908, C.E.P.R. Discussion Papers.
  12. Cremer, Helmuth & Roeder, Kerstin, 2013. "Long-term care policy, myopia and redistribution," Journal of Public Economics, Elsevier, vol. 108(C), pages 33-43.
  13. Nuscheler, Robert & Roeder, Kerstin, 2013. "The political economy of long-term care," Munich Reprints in Economics 19324, University of Munich, Department of Economics.
  14. 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.
  15. Gani Aldashev & Jean-Marie Baland, 2008. "Awareness and AIDS: A Political Economy Model," Carlo Alberto Notebooks 92, Collegio Carlo Alberto.
  16. 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.
  17. 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.
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