Long Term Care Insurance with State-Dependent Preferences

25 Pages Posted: 14 Jan 2020

See all articles by Philippe De Donder

Philippe De Donder

CNRS, Toulouse School of Economics

M.‐L. Leroux

University of Quebec at Montreal (UQAM)

Date Written: 2019

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 first 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 offer 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.

Keywords: long term care insurance puzzle, actuarially fair insurance, risk aversion

JEL Classification: D110, I130

Suggested Citation

De Donder, Philippe and Leroux, Marie-Louise, Long Term Care Insurance with State-Dependent Preferences (2019). CESifo Working Paper No. 8017. Available at SSRN: https://ssrn.com/abstract=3518965

Philippe De Donder (Contact Author)

CNRS, Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://https://www.tse-fr.eu/people/philippe-de-donder

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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