Long-term care policy with nonlinear strategic bequests

Long-term care policy with nonlinear strategic bequests

Helmuth Cremer¹ (with Chiara Canta²)

1 Toulouse School of Economics, University of Toulouse Capitole

2 Toulouse Business School


We study the design of long-term care (LTC) policies when children differ in their cost of providing informal care. Parents do not observe this cost, but they can commit to a "bequests rule" specifying a transfer conditional on the level of informal care. Care provided by high-costchildren is distorted downwards in order to minimize the rent of low-cost ones. Social LTC insurance is designed to maximize a weighted sum of parents' and children's utility. The optimal uniform public LTC provision strikes a balance between insurance and children's utility. Under decreasing absolute risk aversion less than full insurance is provided to mitigate the distortion on informal care which reduces children's rents. A nonuniform policy conditioning LTC benefits on bequests provides full insurance even against the risk of having children with a high cost of providing care. Quite surprisingly the level of informal care induced by the optimal (uniform or nonuniform) policy always increases in the children's welfare weight.

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