Long-term care policy, myopia and redistribution

Cremer, Helmuth and Roeder, Kerstin (2013) Long-term care policy, myopia and redistribution. Journal of Public Economics, vol.108. pp. 33-43.

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Official URL: http://tse-fr.eu/pub/27936

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 su¢ ciently 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.

Item Type: Article
Language: English
Date: 2013
Refereed: Yes
JEL codes: D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
H21 - Efficiency; Optimal Taxation
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:42
Last Modified: 09 Apr 2018 09:06
OAI ID: oai:tse-fr.eu:27936
URI: http://publications.ut-capitole.fr/id/eprint/15841

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