Cremer, Helmuth, Gahvari, Firouz and Pestieau, Pierre (2013) Endogenous altruism, redistribution, and long term care. TSE Working Paper, n. 13-386, Toulouse

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Abstract

This paper studies public provision of long term care insurance in a world in which
family assistance is (i) uncertain and (ii) endogenous depending on the time parents
spend raising their children. Public benefits will be paid in case of disability but cannot
be combined with self-insurance or family aid. The benefits are provided equally to
all recipients and financed by a proportional payroll tax. The paper shows that tax
distortions imply that full insurance is undesirable. It characterizes the optimal tax and
identifies the elements that determine its size. Of crucial importance are the extent of
under-insurance, the effect of the tax on the probability of altruism, the distortionary
effect of the tax, and, with wage heterogeneity, the covariance between the social mar-
ginal utility of lifetime income and (i) earnings (positive effect) and (ii) the probability
of altruism default (negative effect).

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