Review of Economic Studies Vol. 89 No. 4 2022
An Equilibrium Analysis of the Long-Term Care Insurance Market
Abstract
Informal care provided by adult children substitutes for formal long-term care services. However, information about children is not used in pricing long-term care insurance which pays only for formal care. I start by providing descriptive evidence that private information about children’s informal care likelihood results in adverse selection: the market attracts a disproportionate number of individuals who face higher formal care utilization risk due to a lower probability of receiving care from their children. To quantify the welfare consequence of adverse selection, I develop and estimate a dynamic intergenerational model featuring long-term care insurance, savings, informal care provision, and employment choices. Based on the estimated equilibrium insurance market framework, I show that using information about children in pricing insurance contracts reduces adverse selection and results in the average welfare gain of $6,200 per family. Using the non-cooperative feature of the model, I also quantify to what extent parents forgo long-term care insurance to avoid diminishing children’s informal care incentive.
- DOI
- 10.1093/restud/rdab075
- Volume
- 89
- Issue
- 4
- Pages
- 1993-2025
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref