Abstract
Two-sided intergenerational moral hazard occurs (i) if the parent’s decision to purchase long-term care (LTC) coverage undermines the child’s incentive to exert effort because the insurance protects the bequest from the cost of nursing home care, and (ii) when the parent purchases less LTC coverage, relying on child’s effort to keep him out of the nursing home. However, a “net” moral hazard effect obtains only if the two players’ responses to exogenous shocks fail to neutralize each other, entailing a negative relationship between child’s effort and parental LTC coverage. We focus on outcomes out of equilibrium, interpreting them as a break in the relationship resulting in no informal care provided and hence high probability nursing home admission. Changes in the parent’s initial wealth, LTC subsidy received, and child’s expected inheritance are shown to induce “net” moral hazard, in contradistinction to changes in child’s opportunity cost and share in the bequest.
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Notes
For other reasons explaining the slow development of private LTC insurance, please refer to Brown and Finkelstein (2007).
We thank the referee for having raised this point.
Alternatively, the child could also decide to hire help to care for the parent if the child’s wage is above the helper’s wage. The reduction in child wealth would then come from having to pay for help rather than from lowered earnings.
We owe this point to Ken Clements of the University of Western Australia.
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This paper was written in part while the second author was an invited scholar with the Brocher Foundation in Hermance (Geneva). Support by the Foundation is gratefully acknowledged. The authors benefitted from comments provided by participants at the 2nd World Risk and Insurance Economists Congress in Singapore and at the Economics seminar of The University of Western Australia (Perth) as well as by an anonymous referee. The usual disclaimer applies.
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Courbage, C., Zweifel, P. Two-sided intergenerational moral hazard, long-term care insurance, and nursing home use. J Risk Uncertain 43, 65–80 (2011). https://doi.org/10.1007/s11166-011-9120-6
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DOI: https://doi.org/10.1007/s11166-011-9120-6