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

40 Pages Posted: 1 Nov 2012

See all articles by Philippe De Donder

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE)

M.‐L. Leroux

University of Quebec at Montreal (UQAM)

Date Written: October 30, 2012

Abstract

We build a political economy model where individuals differ in the extent of the behavioral bias they exhibit when voting first over social long-term care (LTC) insurance and then choosing the amount of LTC annuities. LTC annuities provide a larger return if dependent than if healthy. We study the majority voting equilibrium under three types of behavioral biases: myopia, optimism and sophisticated procrastination. Optimists and myopics similarly under-estimate their own dependency risk both when voting and when buying LTC annuities. They differ in that optimists know the correct average dependency risk (that determines the return of both social and private insurance), while myopics also under-estimate this average risk (and thus over-estimate the insurance return). Sophisticated procrastinators act as if they under-estimated their own risk when buying annuities, but anticipate this bias at the time of voting.

We obtain that the stylized observation of lack of LTC insurance is compatible with agents being optimistic or myopic, but not sophisticated procrastinators. Increasing the difference in return across dependency states for the LTC annuity is detrimental to sophisticated voters and to very biased myopic and optimist voters. Finally, less myopic individuals may end up worse off, at the majority-voting equilibrium, than more myopic agents, casting some doubt on the usefulness of information campaigns.

Keywords: majority voting, myopia, optimism, sophisticated procrastinators, dependency linked annuity, enhanced life annuity, complementary private insurance

JEL Classification: H550, I130, D910

Suggested Citation

De Donder, Philippe and Leroux, Marie-Louise, Behavioral Biases and Long Term Care Annuities: A Political Economy Approach (October 30, 2012). Available at SSRN: https://ssrn.com/abstract=2168677 or http://dx.doi.org/10.2139/ssrn.2168677

Philippe De Donder (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Marie-Louise Leroux

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

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