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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 differ 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 first-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 tradeoff 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 first-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 sufficiently 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.

Suggested Citation

  • Cremer, Helmuth & Roeder, Kerstin, 2011. "Long-term care policy, myopia and redistribution," TSE Working Papers 12-314, Toulouse School of Economics (TSE), revised May 2012.
  • Handle: RePEc:tse:wpaper:25891
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cremer, Helmuth & Roeder, Kerstin, 2017. "Social insurance with competitive insurance markets and risk misperception," Journal of Public Economics, Elsevier, vol. 146(C), pages 138-147.
    2. Masaya Yasuoka, 2014. "Financing Elderly Care Service Subsidies horizontally differentiated duopoly," Discussion Paper Series 122, School of Economics, Kwansei Gakuin University, revised Oct 2014.
    3. De Donder, Philippe & Leroux, Marie-Louise, 2012. "Behavioral Biases and Long Term Care Annuities: A Political Economy Approach," TSE Working Papers 12-352, Toulouse School of Economics (TSE), revised Feb 2013.
    4. Helmuth Cremer & Pierre Pestieau, 2014. "Social long-term care insurance and redistribution," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 955-974, December.
    5. Leroux, Marie-Louise & Pestieau, Pierre & Ponthière, Grégory, 2015. "Longévité différentielle et redistribution : enjeux théoriques et empiriques," L'Actualité Economique, Société Canadienne de Science Economique, vol. 91(4), pages 465-497, Décembre.
    6. Cremer, Helmuth & Lozachmeur, Jean-Marie & Maldonado, Dario & Roeder, Kerstin, 2016. "Household bargaining and the design of couples’ income taxation," European Economic Review, Elsevier, vol. 89(C), pages 454-470.
    7. Pierre Pestieau & Grégory Ponthière, 2015. "Long-term care and births timing," Working Papers halshs-01131236, HAL.
    8. PESTIEAU, Pierre & PONTHIERE, Gregory, 2016. "The Public Economics of Long Term Care," CORE Discussion Papers 2016008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. De Donder Philippe & Leroux Marie-Louise, 2013. "Behavioral Biases and Long-Term Care Insurance: A Political Economy Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(2), pages 551-575, May.
    10. Pestieau, Pierre & Ponthiere, Gregory, 2016. "Long-term care and births timing," Journal of Health Economics, Elsevier, vol. 50(C), pages 340-357.
    11. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2014. "Longévité différentielle et redistribution : enjeux théoriques et empiriques," Working Papers halshs-01071723, HAL.
    12. repec:eee:pubeco:v:151:y:2017:i:c:p:12-24 is not listed on IDEAS
    13. Cremer, Helmuth & Gahvari, Firouz & Pestieau, Pierre, 2017. "Uncertain altruism and the provision of long term care," Journal of Public Economics, Elsevier, vol. 151(C), pages 12-24.
    14. CREMER, Helmuth & PESTIEAU, Pierre & PONTHIERE, Grégory, 2012. "The economics of long-term care: a survey," CORE Discussion Papers 2012030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    15. Atsushi Miyake & Masaya Yasuoka, 2016. "Which Should the Government Subsidize: Child Care or Elderly Care?," Discussion Paper Series 144, School of Economics, Kwansei Gakuin University, revised Jun 2016.
    16. 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.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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