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Long-term care expenditures and investment decisions under uncertainty

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  • Pablo Garcia Sanchez
  • Luca Marchiori
  • Olivier Pierrard

Abstract

Long-term care (LTC) expenditures of the elderly are high in developed countries and will grow further with population aging. In addition, LTC costs are heterogeneous across individuals and unknown early in life. In this paper, we add uncertainty over the arrival and magnitude of future LTC costs into a life-cycle model with endogenous aging, and we analyze how this affects the optimal behavior of agents. We show that, compared to a deterministic model, uncertainty boosts precautionary savings, lowers investment in preventive care, and weakens the effectiveness of subsidies to encourage prevention. Our results therefore suggest that uncertainty should not be ignored in models that study positive or normative aspects of health investment.

Suggested Citation

  • Pablo Garcia Sanchez & Luca Marchiori & Olivier Pierrard, 2023. "Long-term care expenditures and investment decisions under uncertainty," BCL working papers 171, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp171
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    More about this item

    Keywords

    Health; long-term care costs; uncertainty; stochastic model;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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