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 “bequest rule” specifying a transfer (gift or bequest) conditional on the level of informal care. Care provided by high-cost children is distorted downwards in order to reduce the rent of low-cost ones. Social LTC insurance is designed to maximize a weighted sum of parents’ and children’s utility. When the LTC benefit is uniform and children have no weight in social welfare, the risk of becoming dependent is fully insured. Otherwise the insurance coverage of parents is adjusted to enhance the utility of the caregivers. Parents are never fully insured against the risk of having a high-cost child. A general policy conditioning LTC benefits on transfers provides full insurance even against the risk of having high-cost children. Quite surprisingly the level of informal care induced by the optimal (uniform or nonuniform) policy always increases in the children’s welfare weight.
Chiara Canta, and Helmuth Cremer, “Long-term care policy with nonlinear strategic bequests”, TSE Working Paper, n. 17-839, September 2017.
Chiara Canta, and Helmuth Cremer, “Long term care policy with nonlinear strategic bequests”, European Economic Review, vol. 119, October 2019, pp. 548–566.