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

  • De Donder, Philippe
  • Leroux, Marie-Louise

We develop a model where individuals all have the same probability of becoming dependent and vote over the social long term care insurance contribution rate before buying additional private insurance and saving. We study three types of behavioral biases, all having in common that agents under-weight their dependency probability when taking private decisions. Sophisticated procrastinators anticipate their mistake when voting, while optimistic and myopic agents have preferences that are consistent across choices. Optimists under-estimate their own probability of becoming dependent but know the average probability while myopics underestimate both. Sophisticated procrastinators attain the Örst-best allocation while myopics and optimists insure too little and save too much. Myopics and optimists more (resp., less) biased than the median are worse o§ (resp., better o§), at the majority voting equilibrium, when private insurance is available than when it is not.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-352.

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Date of creation: Oct 2012
Date of revision: Feb 2013
Publication status: Published in The B. E. Journal of Economic Analysis & Policy (Advances), vol. 14, n°2, juillet 2013, p. 551-575.
Handle: RePEc:tse:wpaper:26383
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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