Long-Term Care Policy, Myopia and Redistribution

36 Pages Posted: 27 Jun 2012

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Kerstin Roeder

Ludwig Maximilian University of Munich (LMU); University of Augsburg

Date Written: June 26, 2012

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.

Keywords: long-term care, myopia, optimal taxation

JEL Classification: D910, H210, I130

Suggested Citation

Cremer, Helmuth and Roeder, Kerstin, Long-Term Care Policy, Myopia and Redistribution (June 26, 2012). CESifo Working Paper Series No. 3843, Available at SSRN: https://ssrn.com/abstract=2092580

Helmuth Cremer (Contact Author)

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Kerstin Roeder

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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