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Long Term Care Insurance with State-Dependent Preferences

Author

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  • Philippe de Donder

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

  • Marie-Louise Leroux

    (UCL - Université Catholique de Louvain = Catholic University of Louvain)

Abstract

We study the demand for actuarially fair Long Term Care (LTC hereafter) insurance in a setting where autonomous agents only care for daily life consumption while dependent agents also care for LTC expenditures. We assume that dependency decreases the marginal utility of daily life consumption. We rst obtain that some agents optimally choose not to insure themselves, while no agent wishes to buy complete insurance. We then show that the comparison of marginal utility of income (as opposed to consumption) across health states depends on (i) whether agents do buy LTC insurance at equilibrium or not, (ii) the comparison of the degree of risk aversion for consumption and for LTC expenditures, and (iii) the income level of agents. Our results then oer testable implications that can explain (i) why few people buy Long Term Care insurance and (ii) the discrepancies between various empirical works when measuring the extent of state-dependent preferences for LTC.

Suggested Citation

  • Philippe de Donder & Marie-Louise Leroux, 2021. "Long Term Care Insurance with State-Dependent Preferences," Post-Print hal-03351447, HAL.
    • Handle: RePEc:hal:journl:hal-03351447
    DOI: 10.1002/hec.4423
    Note: View the original document on HAL open archive server: https://hal.science/hal-03351447
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    1. Pierre-Carl Michaud & Pascal St-Amour, 2023. "Longevity, Health and Housing Risks Management in Retirement," Swiss Finance Institute Research Paper Series 23-18, Swiss Finance Institute.
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    3. Marie‐Louise Leroux & Pierre Pestieau, 2023. "Age‐ and health‐related non‐linear inheritance taxation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 897-912, August.
    4. Justina Klimaviciute & Pierre Pestieau, 2023. "The economics of long‐term care. An overview," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1192-1213, September.

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    More about this item

    Keywords

    Long Term Care Insurance Puzzle; Actuarially Fair Insurance; Risk Aversion; State-dependent Preferences.;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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