Family altruism and long-term care insurance
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Family altruism and long‑term care insurance Justina Klimaviciute1,2 · Pierre Pestieau1,3,4 · Jérôme Schoenmaeckers1,5
Received: 4 June 2018 / Accepted: 3 December 2018 © The Geneva Association 2019
Abstract The aim of this paper is to analyse long-term care (LTC) insurance purchase decisions by parents who expect to receive assistance from altruistic children. We first propose a simple theoretical model in which we show that the effect of children’s altruism on parents’ insurance decisions is ambiguous and depends on a number of factors: the degree of substitutability between informal and formal care, the degree of parental altruism, and the curvature of the utility functions. We then run an empirical test using data from the U.S., France, Spain, Germany and Israel, and proxy altruism with assistance provided to healthy parents. We find that the effect of children’s altruism is negative in Germany and Israel but not significant in the United States, France and Spain, which possibly suggests that the different forces identified in the theoretical model offset each other. Keywords Long-term care insurance · Altruism · Informal care
* Jérôme Schoenmaeckers [email protected] Justina Klimaviciute [email protected] Pierre Pestieau [email protected] 1
University of Liège, Liège, Belgium
2
Vilnius University, Vilnius, Lithuania
3
CORE, Université Catholique de Louvain, Ottignies‑Louvain‑La‑Neuve, Belgium
4
Toulouse School of Economics, Toulouse, France
5
Haute Ecole de la Ville de Liège, Liège, Belgium
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Introduction The rise of long-term care (LTC) constitutes a major challenge for advanced economies. Due to ageing, an increasingly large proportion of the population is falling into dependence, that is, these people are unable to carry out basic daily activities such as eating, washing, etc., and hence need to receive LTC. The provision of LTC— whether formal or informal (i.e., provided by family and friends)—is extremely costly, which raises the question of LTC funding. Given the high probability of falling into dependence and the high costs of LTC, one would expect, from the perspective of rational choice theory, that individuals would purchase private LTC insurance to insure themselves and their family against the high costs of LTC. However, only a small fraction of the population at risk purchases private LTC insurance in the U.S. and in France. In other countries this fraction is negligible. This is the wellknown LTC insurance puzzle that can be explained by various factors on both the supply side and the demand side of the private LTC insurance market (see Cremer et al. 2012; Pestieau and Ponthière 2012; Brown and Finkelstein 2011). One of the factors often mentioned in the literature is the presence of family that leads to informal care.1 The argument is that informal care crowds out LTC insurance,2 but as we show, the validity of this argument impinges on the substitutability of formal and informal care, which is not well
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