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Long-Term Care and Lazy Rotten Kids

  • Cremer, Helmuth

    ()

    (Toulouse School of Economics)

  • Roeder, Kerstin

    ()

    (University of Munich)

This paper studies the determination of informal long-term care (family aid) to dependent elderly in a worst case scenario concerning the "harmony" of family relations. Children are purely selfish, and neither side can make credible commitments (which rules out efficient bargaining). The model is based on Becker's "rotten kid" specification except that it explicitly accounts for the sequence of decisions. In Becker's world, with a single good, this setting yields efficiency. We show that when family aid (and long-term care services in general) are introduced, the outcome is likely to be inefficient. Still, the rotten kid mechanism is at work and ensures that a positive level of aid is provided as long as the bequest motive is operative. We identify the inefficiencies by comparing the laissez-faire (subgame perfect) equilibrium to the first-best allocation. We initially assume that families are identical ex ante. However, the case where dynasties differ in wealth is also considered. We study how the provision of long-term care (LTC) can be improved by public policies under various informational assumptions. Interestingly, crowding out of private aid by public LTC is not a problem in this setting. With an operative bequest motive, public LTC will have no impact on private aid. More amazingly still, when the bequest motive is (initially) not operative, public insurance may even enhance the provision of informal aid.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7565.

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Length: 35 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7565
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  1. CREMER, Helmuth & gahvari, Firouz & PESTIEAU, Pierre, 2013. "Uncertain altruism and the provision of long term care," CORE Discussion Papers 2013047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 155-65, February.
  3. Siciliani Luigi, 2013. "The Economics of Long-Term Care," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(2), pages 343-375, August.
  4. Edward C. Norton & Lauren Hersch Nicholas & Sean Sheng-Hsiu Huang, 2013. "Informal Care and Inter-vivos Transfers: Results from the National Longitudinal Survey of Mature Women," NBER Working Papers 18948, National Bureau of Economic Research, Inc.
  5. Bisin, A. & Verdier, T., 1997. "The Economics of Cultural Transmission and the Dynamics of Preferences," DELTA Working Papers 97-03, DELTA (Ecole normale supérieure).
  6. CANTA, Chiara & PESTIEAU, Pierre, 2012. "Long term care insurance and family norms," CORE Discussion Papers 2012017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Wolff, Francois-Charles, 2006. "Microeconomic models of family transfers," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
  8. repec:dgr:uvatin:20070032 is not listed on IDEAS
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