Essays in the Economics of Long-Term Care.

Summary This thesis is devoted to the problems of old age dependency which is increasingly becoming a "hot" topic in today's aging societies. The thesis consists of three independent chapters that address different issues related to dependency by highlighting the interaction between three institutions: the family, the state, and the market. Chapter 1 focuses on the interaction between the family and the market by investigating intra-family moral hazard as one potential explanation for the "LTC insurance conundrum," namely the surprisingly low demand for private LTC insurance. The intrafamily moral hazard argument, proposed by Pauly (1990), is based on the idea that insurance induces children to favor formal help for their parents (and thus reduce their informal help) because the cost of formal help is (at least in part) covered by the insurer and thus reduces the parents' future inheritance less than in the case without insurance. Parents who value their children's help may therefore forgo purchasing insurance. The chapter proposes and formally investigates the idea that the magnitude of intra-family moral hazard and, therefore, of not purchasing LTC insurance may be different in the case where insurance benefits are lump sum and in the case where they are proportional to LTC expenses. The results not only formally confirm that lump sum benefits help to limit intra-family moral hazard but also demonstrate that in some cases they eliminate it completely, while the effect of proportional benefits is ambiguous at best. As a result, the chapter shows that a parent is more likely to decide to purchase LTC insurance when the benefits are lump sum than when they are proportional. Based on these results, the chapter also offers some observations about public policy. The role of public intervention is further explored in Chapter 2, which analyzes optimal LTC policy in the context of intra-family moral hazard. In addition to addressing the inefficiencies present in this context, the chapter addresses the redistributional issues associated with wealth heterogeneity. The analysis reveals that intra-family moral hazard is a sufficient justification for insurance-based public intervention: if not necessarily for the introduction of compulsory public insurance, at least for the taxation or subsidization of private insurance premiums. While the first two chapters study the family from the perspective of the parent-child relationship, Chapter 3 invites consideration of another important but so far much less analyzed context, namely the context of older spouses. The chapter proposes a theoretical model of the dependency-related problems faced by an elderly couple and explores the optimal public intervention in this context as well as providing interesting observations about private LTC insurance for both the wife and the man.