De Donder, Philippe and Leroux, Marie-Louise (2013) Behavioral Biases and Long Term Care Annuities: A Political Economy Approach. B. E. Journal of Economic Analysis & Policy, vol. 14 (n° 2). pp. 551-575.

Abstract

We develop a model where individuals all have the same probability of becoming dependent and
vote over the social long term care insurance contribution rate before buying additional private
insurance and saving. We study three types of behavioral biases, all having in common that
agents under-weight their dependency probability when taking private decisions. Sophisticated
procrastinators anticipate their mistake when voting, while optimistic and myopic agents have
preferences that are consistent across choices. Optimists under-estimate their own probability
of becoming dependent but know the average probability while myopics underestimate both.
Sophisticated procrastinators attain the Örst-best allocation while myopics and optimists insure
too little and save too much. Myopics and optimists more (resp., less) biased than the median
are worse o§ (resp., better o§), at the majority voting equilibrium, when private insurance is
available than when it is not.

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